By Dylan Emery The Mercury OST Japan Fund, is the only one of sixof Standard & Poor's Micropal-list...
By Dylan Emery
The Mercury OST Japan Fund, is the only one of sixof Standard & Poor's Micropal-listed Japanese equity offshore funds that made a profit last year.
The fund returned 1.84% over the 12 month period to 1 November 2000 against a sector average loss of 13.35%. Most of the funds in this sector have performed significantly worse relative to last year and the year before.
Mercury OST Japan Fund is also one of only eight funds in the sector to stay within the top 30 rankings for the last three years and the only one to stay within the top 12.
It is a growth-orientated portfolio that primarily uses a stock-picking strategy. Managers are encouraged to pursue new ideas, rather than assiduously following the company line.
The Japanese equity team looks at every company with a market cap above ´250bn. This core research list currently comprises around 300 stocks, and covers 85% of Topix, the fund's benchmark. Tim Orchard, fund manager of the Mercury OST Japan Fund attaches a lot of importance to company visits.
He says: "It is vital to obtain information directly from companies themselves, as this is a key way of spotting potential earnings surprises and hence mis-priced stocks."
The group is one of the biggest Japanese pension providers and the team leverages off this fact to see management in companies that might otherwise be unwilling to see them. In 1999, the Japanese equity team made 694 company visits. It also meets with sell-side analysts to get as balanced a view as possible on the market.
The team consists of 15 investment professionals, each with their own area of specialisation. After having analysed the companies, they discuss every stock, bringing all the information they have gathered to the table. Each stock is then given a score that reflects both the attractiveness of the stocks relative to the universe and also their active weighting in the portfolio. In this way portfolio construction is a part of the stock analysis process.
Scoring works as follows: every manager on the team gives a score in each of the seven categories.
The score range is from one to five and reflects how good the company is in that area relative to the overall market.
Management, competitive advantage, industrial attractiveness, short-term earnings growth, long-term earnings growth, EPS growth and valuation are all rated. A senior fund manager then monitors each of these categories to make sure the scores are evenly and fairly spread between stocks.
Orchard said: "The overall rating is the simple average of the seven categories. This score then determines the approximate active weighting of each of the stocks in our research universe.
"Final stock weight is decided, again by rigorous team discussion, taking into consideration modelling using the Barra system. It is evident from the categories that we place a strong emphasis on earnings surprise and growth." The result of this strategy is that this sterling-denominated fund has been in the first quartile over one, three and five years in the offshore Japanese Equity sector. The best performing year for this Micropal five-star rated fund was 1998, when performance was 98.19%, relative to a sector average of 88.77%.
However, it is longer periods that show how the fund's consistency makes a bigger difference. Over the five years until the end of 1999, the fund gained 51.24% relative to an average sector loss of 11.97%.
Two global vehicles
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Must appoint separate CEOs and boards
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