An update - Q3 2019: Man GLG Japan CoreAlpha Fund

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  • 09 mins 26 secs
In this latest update, we take a look at the Japan CoreAlpha Fund's progress through Q3 and some interesting figures since its inception.

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Man GLG Japan CoreAlpha Fund Q3 2019 update: Recorded 08 Oct 19 by Stephen Harker
Hello and welcome to the Man GLG Japan CoreAlpha Fund Third Quarter Update.
As you know the Man GLG Japan CoreAlpha Fund (“the Fund”) is invested in low price to book stocks in Large1 Cap
Value. Over 90% of the portfolio is invested in the Large Cap Value segment of the Russell/Nomura indices2, and
around 80% is invested in the top 100 stocks within TOPIX. The portfolio hasn’t really changed significantly in the
course of 2019. The top 10 is largely unchanged in terms of names, although there has been a little bit of juggling and
shifting weightings over time. We’ve added seven new names in the first nine months of the year and completely sold
out of four others. But essentially the portfolio is still a Large Cap Value fund, although we have been becoming more
aggressive in terms of our positioning as time has gone on and the portfolio is more positioned for a rising market.
If you turn to page 2, you can see the returns for the six Russell/Nomura indices for the third quarter. It hasn’t been a
good quarter for two reasons: one Growth stocks outperformed Value by almost 2% and two; within the whole range
of stocks within the market, low PBR performed worse than average stocks and worse than high PBR stocks. So
there was a payoff to PBR - the higher the PBR - the higher the returns. So as a low PBR fund we obviously suffered
from that and underperformed the Large Cap Value index (Russell/Nomura Large Cap Value Index).
Turning the page 3, this chart shows (since 1985) for each calendar year, the performance of Value divided by Growth
starting January 1st of each year. The dark blue line shows where we are in 2019 up to the early part of October. The
yellow line shows what happened in 2018 when Value and Growth were more or less level pegging at the end of the
year, after Value was trailing earlier in the year. So far in 2019 Value is ranked 33rd out of 35 years in terms of
underperformance. It’s unusual for Value to underperform, but it’s certainly behind so far. There was a pickup in early
September, a quite dramatic reversal in the market, which didn’t last very long, and since then there’s been a trailing
away again. Hopefully we will see this normalised and Value starting to win again towards the end of the year.
On page 4 we look at the correlation of the Japanese bond yield, the 10-year bond yield, pitched against Value divided
by Growth, going back to 2009. This is the 101⁄2 year period in which Value has been losing ground against Growth.
And you can see quite clearly that as Value has underperformed, interest rates have dropped, and it’s easy to suggest
that there is causation here from interest rates into the performance of Value. Essentially Growth stocks are high
duration/long duration assets, and Value stocks short duration assets.
The 10-year bond yield was about 1.5% in 2009. It fell consistently until 2016 when it went negative, bottoming in
early July of 2016. It then reversed and went slightly positive, only to reverse from October of last year when interest
1 Top, Large, Mid, Small, Growth and Value all refer to Russell/Nomura indices. 2 The indices mentioned herein have been selected by the Investment Manager for performance illustration and comparison purposes only. They are not formal benchmarks and do not form part of the Fund’s investment objectives or investment policy.
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rates started to fall again and went negative and more or less fell back to the ‘16 low point. There has been a little tick
up in recent months, but it’s not really significant. Value underperformed heavily up to July of ‘16, a really significant
drop, and then had a stupendous recovery in the second half of ’16 - basically five months when US interest rates
went up even more and Value was having a great time. Then since 2017 we’ve been in reverse gear and Value has
been losing relative to Growth and more recently it’s been driven by interest rate falls in Japan.
What I’d like to do now is just take a closer look at what’s happened in 2019 - the same chart, but just over the last
nine months or so. Again the blue line is the 10-year JGB, and it started the year at roughly zero and has gone
negative, and it went to maximum negative towards the end of August. Then in early September there was a reversal,
which was global; a global move in interest rates and a global reversal in Value/Growth, and we had two days in the
second week of September when Value really performed stormingly well. And as you can see the upward momentum
in interest rates has stopped, and so has the momentum in Value versus Growth.
Page 6 shows the Fund price to book ratio divided by the TOPIX price to book ratio - so the value of the weighted fund
against the weighted market. What you can see (this is going back to January 2006 when we first kicked off with the
UK CoreAlpha Fund) in the period up to 2009/10 there was something like a 10-15% discount of the portfolio relative
to the average stock in the market. then from 2009/10 onwards we’ve seen a gradual and consistent derating of the
value of the Fund so that the price to book ratio is no longer at a 15% discount, but has dropped and dropped and
dropped to the point where in the last two months, the discount has reached a massive 50%. So the derating of the
Fund has been much greater than the derating and the underperformance of Large Cap Value against the index, which
is really counterintuitive. But we’ve basically been rotating, selling winners, buying losers, and hopefully trying to keep
rebuilding the Value tilt. We’ve ended up with a portfolio which is extraordinarily cheap. In absolute terms, it’s on 0.6
book, and in relative terms, half of the average for the TOPIX. We are absolutely astonished by this. The portfolio is
probably one of the best quality portfolios that we’ve had in the life of my career as a portfolio manager in Japan, and
yet we’re able to invest in stocks like Honda at a 50% discount, in Mitsubishi UFJ at a 60-odd percent discount, and
likewise in Nippon Steel at a discount of that order, over 60%.
Finally on page 7, the chart here shows the professional share class unit price since inception in January of 2006.
We’ve been at this now for nearly 14 years and the unit price on 7th October was 181.8p. The remarkable change that
has taken place since 2012, when the portfolio is something like 150% up in seven years. We’ve had three upwards
legs, one in 2013, one in 2014/15 and one in 2016 and what’s really interesting is that over the last year/last three
years, the unit price has basically been becalmed in a very narrow range around 180p, and this hasn’t typically
happened before. The key driver of this is not the market, but the yen/sterling exchange rate. So the unhedged fund
has been benefiting enormously from sterling’s weakness, and the market has been relatively weak in that period, and
we’ve been underperforming.
So we draw encouragement from the fact that the Man GLG Japan CoreAlpha Fund has been outperforming the UK
market for a significant length of time, and we hope that it will continue to do so. We suspect that this stability will not
be continued and we’re assuming that another upward leg comes at some point. But obviously we can’t guarantee
that. We’re really struck by the extraordinarily long period when interest rates have been falling, the extraordinary
period of Value underperforming and more particularly the extraordinary derating of the Value stocks within the
portfolio. This is an extraordinarily cheap bunch of stocks relative to the TOPIX, and we just can’t believe that this will
be sustained, and we hope that at some point normal service will be resumed.
Thank you for listening.
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5 year Discrete Performance in GBP (net of fees)
% change in GBP

(JPY) Man GLG Japan CoreAlpha Fund (%)
Russell/Nomura Large Cap Value† (%)
TOPIX
TOPIX
(%)
(%)

30/09/2018 to 30/09/2019 - 15.1 - 11.5 - 10.4
30/09/2017 to 30/09/2018 + 8.8 + 10.8 + 10.8
30/09/2016 to 30/09/2017 + 35.4 + 31.1 + 29.3
30/09/2015 to 30/09/2016 - 7.7 - 10.6 - 4.2
30/09/2014 to 30/09/2015 + 9.6 + 10.3 + 8.4
†Russell/Nomura Large Cap Value Index
Past performance is not indicative of future results. Returns may increase or decrease as a result of currency fluctuations.
Figures shown total return using the professional accumulation share class C, NAV in GBP, based on midday prices.
Performance data is calculated net of 0.75% management fees with income reinvested, and does not take into account sales and redemption charges where such costs are applicable. Other share classes charge higher fees. The Indices mentioned herein have been selected by the Investment Manager for performance illustration and comparison purposes only. They are not formal benchmarks and do not form part of the Fund’s investment objectives or investment policy.
Source: Man GLG and Lipper.
CoreAlpha Model
Management of the Man GLG Japan CoreAlpha Fund (the “Fund”) is based on a model portfolio (the “CoreAlpha Model”). This establishes fixed-weight targets for stock holdings; management decision-making is focused on what these fixed weights should be. Actual Fund weightings will deviate from the CoreAlpha Model as a result of market drift. Such deviations are corrected at the fund manager’s discretion either by use of cash inflows and outflows, or by buying or selling stock to return the actual Fund back towards the CoreAlpha Model weightings. CoreAlpha Model weights are subject to change at any time at the discretion of the fund managers.
The management objective is to have a fully-invested portfolio at all times, meaning zero cash in the CoreAlpha Model. The actual cash weighting may also vary for technical reasons such as dividends declared but not yet available for investment. For further information please refer to the Fund’s prospectus.
Data relating to the CoreAlpha Model can vary from the actual position of Man GLG Japan CoreAlpha Fund at any time due to market movements and cash flows. Actual positions are available on request.
Important considerations
Prior to investing in the Fund investors should carefully consider the risks associated with investing, whether the Fund suits their investment requirements and whether they have sufficient resources to bear any losses which may result from an investment in the Fund. Investors should only invest if they understand the terms on which the Fund is offered. Investors should consider the following risks and where appropriate seek professional advice before investing:
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