Feeling the Oite (Tailwinds)
Japanese shares have staged quite a recovery with the Nikkei 225 Stock Index back above the 22,000 level as a mix of positive developments on the global and home front have supported investor enthusiasm. With the month of June already underway, we have seen a plethora of economic data flowing in and we take the time to review the salient developments in the country. Considering the improving prospects, we have reinforced our view on the Platinum Japan Fund (ASX:PJF) and maintain our BUY rating for Members with no exposure to the vehicle.
It was a somewhat weak first quarter of 2018 (1Q18) when Japan’s economy shrank by an annualised 0.6% amidst a tight consumer market which deferred spending, as evidenced by household spending contracting by 0.1%. However, Japan’s economy is starting to resume its growth with May survey numbers at the 51.7 level indicating that business activity expanding.
Optimism is also on the rise as the metrics from IHS Markit indicate that Future Output expectations have surged to its highest level since January while Backlogs as evidenced by Incomplete Manufacturing Work continue to rise indicating that demand is still outpacing capacity.
Source: IHS Markit
Furthermore, we believe that the 1Q18 weakness was exaggerated considering the major detractors of growth included some temporary factors, with bad weather causing disruptions in operations. Higher prices for fresh food and energy weighed on consumption.
We believe that consumption has already picked up and that will be reflected in the next set of numbers. We have seen higher wages, with base pay increasing by 1.3% year-on-year in March to mark its strongest rise since 1997. Overtime pay also increased 1.8% year-on-year and was at its highest since November 2017.
In light of that fact, the latest data from the Cabinet Office show an uptrend in Consumer Confidence with the metric returning to a 43.8 result and an 0.20-point improvement from the April numbers. Furthermore, an increasing number of survey respondents have expressed a greater willingness to buy durable goods which is a strong indicator of increased confidence considering the greater costs and commitment involved.
Next, Japan’s Machinery Orders are a highly important leading indicator considering its weight in the economy as well as it provides a hint for domestic capital spending. The latest numbers show that machinery orders surged 10.1% in April easily reversing the 3.9% fall in March which suffered from the trade tensions earlier on.
The result was its strongest surge since January 2016 and easily beat consensus expectations for a 2.8% increase. Export orders also surged sharply following two consecutive monthly contractions and are an indicator of improving business sentiment as well.
On that note, Exports also registered better than expected growth in May, up 8.1% year-on-year (May17: 7.8%) and beat the consensus forecast for a 7.5% increase. This suggests a pickup in global demand and proof of improving business confidence.
In light of these improving factors, not to mention the attractive valuations in Japanese equities, we maintain our BUY rating on the Platinum Japan Fund for Members with no exposure to the vehicle.
Fund Overview
As a reminder, Platinum (ASX:PJF) is a well-established Australian‑based manager, specialising in international equities. The Platinum Japan Fund’s investment objective is to provide capital growth over the long-term through searching out undervalued listed (and unlisted) investments in the Japanese and Korean region.
The Fund has kept pace with a robust rally in Japanese equities, and has an impressive record of outperformance over a long time period, gaining circa 15.0% per annum over the last 10 years.
It should be noted that the Fund is suitable for investors seeking a truly active investment exposure to Japan, as its relatively flexible mandate (which includes the ability to short stocks) can result in returns which are significantly different from the benchmark Japanese market index.
Fund Overview
Leadership & Management
The Fund’s portfolio manager is Scott Gilchrist (BEng (Hons)), who has over 15 years’ investment experience serving Platinum Asset Management and has been managing the Platinum Japan Fund since December 2014. While there is an element of key person risk with the fund, the investment managers at Platinum have an excellent reputation which bolsters our positive view here.
Investment Approach
Platinum’s central aim is to achieve positive absolute returns for Investors. The investment objective of Platinum Japan is to provide capital growth over the long-term through searching out undervalued listed (and unlisted) investments in companies in Japan and Korea.
Platinum (ASX:PJF) has an independent style of investment management, driven by a thematic stock picking approach. In our view, the Fund has sound investment logic, and we are attracted to the value driven approach of the Fund.
Portfolio Structure
The Portfolio itself reflects the Fund’s strategy. The portfolio usually holds between 40 to 80 securities, and cash may be held when undervalued securities cannot be found. Furthermore, the portfolio will typically have 50% or more in net equity exposure.
Given the focus of the Fund is Japan, the proportion of Korean securities in the portfolio is limited to a maximum of 25% of the value of the portfolio at the time of investment. The Fund may invest in companies not listed in Japan or Korea, when their predominant business is conducted in Japan or Korea.
As a consequence of the investment strategy, the portfolio has been built up from a series of excellent individual stock selections, rather than from a predetermined asset allocation.
This makes the fund very ‘benchmark unaware’, which has been reflected in investment weightings considerably different to the MSCI Japan Index, and reflected in relative performance.
Realised Return
The Platinum Japan Fund (ASX:PJF) has repeatedly outperformed against its benchmark and continues to boost an impressive track record. From inception in 1998, the fund’s Class C shares (original recommendation) have performed strongly, generating a return of 15.0% per annum to 31 May 2018, net of fees and in Australian dollars. This compares to the MSCI Japan Index which has returned only 3.0% per annum over the comparable period.
Source: Platinum Japan (ASX:PJF)
It is also worth noting that this outperformance over the index is consistent across all reported time periods, although we don’t expect this to always be the case, especially over the shorter term 1-month and 3-month time frames.
Source: Platinum Japan (ASX:PJF)
Regarding more recent performance (1- and 3- month) and the fund is tracking behind the benchmark mainly due to the significant differences in the fund’s sector allocation. The fund has a significantly higher exposure to the Information Technology (IT) sector which has experienced some volatility relative to sectors that are benefitting from the global economic recovery such as Industrials, consumer discretionary and materials sectors (chemical producers).
Distributions are paid annually on June 30th. The latest distribution was 27.0295c and based on the 28 June 2016 entry price of $4.28 the fund was trading on a yield of 6.32%.
Fee Structure
The Management Expense Ratio for the C Class shares (standard option) is 1.35% per annum, which includes GST, administration costs and investment costs. While the P Class shares (performance option) has a 1.10% p.a. fee and a 15% p.a. performance fee if the Fund’s return exceeds its index (MSCI Japan AUD).
The only additional cost is the buy-sell spread occurred when buying or selling units, which is 0.2% of the Net Asset Value unit price. There are no establishment, contribution or withdrawal fees and no adviser service fees (i.e. trailing commissions).
There is a minimum initial investment of A/NZ$10,000 with the option for implementing a Regular Investment Plan in A/NZ$5,000 plus A/NZ$200 on monthly/quarterly basis.
Application and withdrawals can be made every Sydney business day.
Fund Positioning
Since we just recently covered the Fund back in March (FAT-AUS-864), there hasn’t been substantial changes except for the fund manager trimming some positions and increasing cash to a Net 10.3% (previously 7.8%). We believe this is just standard profit taking with the fund manager selling overvalued positions.
We also note that compared to the previous coverage, the Fund has completely exited from South Korea (previously 1.8%) likely as a side effect of the increasing risk and uncertainty in the peninsula at the time of the fund’s reporting.
Source: Platinum Japan (ASX:PJF)
Since our last coverage back in March, the fund manager has made some significant alterations to the sector weightings, price fluctuations notwithstanding, though the ranking has remained unchanged.
The fund manager has significantly reduced weightings in Consumer Discretionary (-270 bps), Materials (-240 bps), and Financials (-120 bps) which we believe to be a combination of some shares rallying and profit taking activity as reflected by the bump up in the cash position by 260 basis points and increased allocations to Health Care (+260 bps), IT (+70 bps) and Industrials (+50 bps). Overall exposure to the top 4 sectors has lowered to 66.4% and is much less concentrated compared to the previous 70.3%.
Source: Platinum Japan (ASX:PJF)
A notable difference with the index is the fund’s substantial underweighting of the consumer sector as in consumer staples and consumer discretionary, where the fund has a short position equivalent to -0.8% versus the index which has an 8.5% weighting. The fund is also 769 basis points underweight against discretionary.
We believe that this substantial difference owes to the fact that consumer stocks tend to be easily overvalued while its growth prospects aren’t as positive given Japan’s greater reliance on exports vis-à -vis domestic spending.
The fund’s overweight exposures are in IT (+1,362 bps), Energy (+636 bps), and Materials (+446 bps) which are benefiting from Japan’s High-Tech sector. The notable technologies that the fund is looking at are in: (i) Quantum Computing, (ii) Machine Learning, (iii) Advanced Driver-Assistance Systems and (iv) Robotics (a view shared by our Asian Equities team) (v) electric vehicles via Lithium Ion batteries and the (vi) Blockchain among many other innovations.
Top 10 Holdings
Moving on to specific holdings, despite the fund being overweight in some sectors relative to the index, the fund remains fairly diversified with no single investment exceeding 5% of the total fund value. Below we see the fund’s top 10 positions:
Source: Platinum Japan (ASX:PJF)
Looking at the top 10, not much has changed, especially in the top 4. The most notable addition to the top 10 was Murata Manufacturing which manufactures electronic components and has moved to the 5th spot. This stock saw a jump in price spiking 14.5% in the month of May alone as the company benefits from high demand for multilayer ceramic capacitors and is currently in the peak season for electronics. Electronics manufacturer, Kyocera, also benefited from the bump and was in the 9th spot.
These companies replaced Sumitomo Metal Mining and JSR Corporation, whose shares declined for the month as they were both highly sensitive to the ongoing trade tiff between the US and its trade partners as well as their sensitivity to currency fluctuations.
Summary
The latest economic data coming from Japan indicates an improving economy that is seemingly resilient to the US-China trade tiff. Furthermore, business confidence is on the rise as production continues to be outpaced by demand. Consumer confidence is also improving with higher wages and a favourable labour market indicating that the economy will be support by domestic consumption as well.
The outlook for Japan is therefore strong, with the economy being driven by a combination of cyclical improvements in global demand, increased confidence in Japan’s place in the global manufacturing complex, surging inbound tourism, the upcoming 2020 Tokyo Olympics that will support consumer demand from tourists, and expansionary fiscal policy set to provide further growth.
Against this backdrop, we believe that the Japanese stock market is going to be one of the better performing stock markets this year.
Platinum Japan Fund (ASX:PJF) has been a strong performer for us to date since first being recommended, and with Japan’s economy set to improve even further, we maintain our BUY recommendation for Members without exposure.
Disclosure: Interests associated with Fat Prophets declare a holding Platinum Japan (ASX:PJF).
