JFÆs new Japan brain
JF Funds, the Jardine Fleming equities giant, hopes a new fund manager can reverse the recent troubles at its JF Japan Fund. It is one of the largest single foreign funds operating in Japan and has been in existence for 30 years, so JF executives like to think of it as the Magellan Fund of Asia. Just as the real Magellan Fund in the US made the wrong call in 1999 by moving too early into bonds, the JF Japan Fund took the wrong bet in 2000. Then-fund manager Richard Whittall had pumped the fund so heavily into high-tech that it no longer resembled a flagship country fund, and the tremendous gains he amassed in the 1999 Japanese equities rally were lost in 2000. The market’s false dawn forced Whittall to remove his bets and diversify to the point that the fund began to resemble an index more than a bottom-up country fund.
Whittall, who led the fund for six years, has since left the firm after many years of service to manage a boutique investment firm in London. This has opened the door to 34-year-old Mark Wood, who, despite his youth, has considerable asset management experience in Tokyo, to take the helm. He joined JF in Tokyo in September of last year and was publicly unveiled to clients and the media in Hong Kong yesterday, to let them know what they can expect in the post-Whittall world.
Wood was head of Japanese equities for three years at HSBC Asset Management, where he ran a small but aggressive team from 1996 to 1999. He also served as executive director of Japanese equities at TALCEF Global Asset Management in Hong Kong before joining JF. He indicates now that clients can expect the same aggressive style that marked his tenure at HSBC.
He sees the Japanese economy slowing to only 1% GDP growth this year, but the financial markets have priced in even worse expectations, making now a good time to start building equities positions, he argues. He has already boosted the fund’s top-five holdings up to 4-5% of the portfolio each, and believes this year the top 10 or so stocks could comprise up to 50% of it. This is a bold return to aggressive bets, but Wood also makes clear he sees 5% as a ceiling for any one company – a sign that the excesses of the Whittall days won’t be repeated. The fund’s tracking error, which Whittall cut down from 19% to 6.5% last year, has already begun edging upward. His top five now are Canon, Nikko Securities, Mabuchi Motor, NEC Corp. and Nintendo.
Wood is bullish because the large JF Funds investment team in Tokyo – it is 12 people – visits a huge number of companies (1200) and he says there is no complacency about M&A and restructuring. Rather, he expects this will take place across many sectors more quickly than the market expects. Furthermore, the unwinding of cross-shareholdings spurred on by index vendors’ adjusting for free floats and by the introduction of mark-to-market accounting the coming Japanese fiscal year means the dampener this has put on stocks will pass by March.
He is particularly keen on companies that will benefit from NTT DoCoMo’s push toward third generation mobile telephony. Although he remains neutral on NTT DoCoMo itself, he feels other companies related to the industry, such as suppliers and parts makers, will look attractive. He has begun buying these companies when their valuations fall below 30x earnings. He is also keen on sectors such as oil that are aggressively consolidating. But JF doesn’t want its country funds to look like indices, so rather than underweight the sectors he dislikes, Wood is completely out of undesirable areas such as shipbuilding and steel.