Schroder Japan frustrated by short term performance over year to end July 2019 but sees value in portfolio and is prepared to raise gearing. Over the period, the NAV and share price total returns were -4.6% and -8.4%, respectively, compared with +1.0% produced by the TOPIX.
The chairman said “The single largest frustration is in valuations. Our manager believes the shares in the portfolio are simply undervalued by a market that has not been focusing on value. I would turn this round, and see it as an opportunity. We know from the history of this company that, if the manager can continue to find the right companies, performance will follow.
While mindful of the overall level of portfolio risk, your board is therefore supportive of the manager increasing the scale of the positions in some of the holdings that have underperformed. We also agree with the manager’s confidence in using the gearing facility.”
Extract from the manager’s report
The manager said: “The main impact on performance over the last 12 months came from the Company’s “value” style bias – its emphasis on shares on lower valuations – and from the level of gearing. Gearing was 12.3% at the end of July, having generally been in a range of 12-15% during the year. The gearing made a negative contribution as a result of the negative market return in yen terms.
Within the portfolio there were negative impacts from both sector allocation and stock selection, but there were few large individual positive or negative stock contributions. The bulk of the underperformance came from small negative contributions from a wide range of stocks, reinforcing our view that style issues had an unusually large influence on performance.
Among individual stocks, the largest negative contribution came from Hi-Lex, a small-cap auto component supplier. In the absence of any positive stock-specific news, the share price has drifted lower under the influence of trade friction on the global supply chains for autos, exacerbated by the weakness in small caps generally. Softbank, a major telecom conglomerate, which is not held in the portfolio, also had a negative impact on relative performance as the stock price was driven up by several pieces of news flow.
Some of these negative influences were offset by the strong performance of Disco, a maker of specialist equipment used in semiconductor production. After some initial weakness, investors have become more confident that a cyclical slowdown in the company’s earnings is coming to an end and the stock has performed strongly since the beginning of 2019. Hitachi Transport, a freight transport and logistics provider, also performed relatively well in the last twelve months, especially during the market decline at the end of 2018.”
SJG : Schroder Japan frustrated by short term performance