It is no mean feat that GAM has consistently fared well and stayed ahead of the pack – much of its success is attributable to its steadfast commitment to active investing principles, which has earned GAM this year’s Top Mutual Fund Award in Japan Large-Cap Equity. We sat down with Ernst Glanzmann, Lead Manager of Japan Strategies, to talk about the asset manager’s investment philosophy and insights on the Japanese market.
BENCHMARK (BM): Congratulations! Your fund has consistently outperformed the benchmark and peers! Could you share with us your investment philosophy and your stock selection approach?
Ernst Glanzmann (EG): Thank you. Our investment approach is based on the belief that a scarce number of leading firms deliver superior portfolio returns over a longer holding period if purchased for good value. Essentially, we select leading businesses with sustainable, superior long-term growth; high return on equity; low leverage; and low capital intensity. Our portfolio is concentrated, typically comprising 20–30 positions with equal weightings. The annual rebalancing of weights over a period of 12 months is executed in June each year.
BM: Japan’s macro picture is turning sanguine – international demand for Japanese high-tech electronics remains strong, monetary policy remains accommodative, PMI hovers at multi-year highs, and the unemployment rate has hit a 25-year low. Against this backdrop, which sectors could benefit the most, and how do you position to seize these opportunities?
EG: Yes, I agree that Japan’s macro backdrop is favorable, and therefore we remain positive on Japan equities. During the last five years, net profits of TOPIX constituent stocks have grown, on average, 18% annually, while the index has risen 16% per annum. With both the domestic and global economy sustaining a positive momentum, investors were reluctant to pay a premium for this kind of growth. Consequently, the trailing price-to-earnings ratio remains attractive, at around 14 to 17 times.
At the end of 2017, the largest absolute and relative exposure was to industrials, followed by consumer discretionary. Japan’s small business survey, published by the Shoku Chukin Bank, and the leading diffusion index, calculated by the Cabinet Office, both remain at levels that indicate continued expansion. In addition, orders for machinery and building factories show firm growth, not least due to the further tightening of supply over demand within key industries such as electronic components and semiconductors. Increasingly, companies are announcing plans to build new plants in Japan – for the first time in more than 20 years, in some cases.
Information technology is another sector we are paying attention to. The ever-tighter labor market is driving demand for work process improvement, yet firms are eager to contain cost pressure as much as possible. One way to achieve both is by further standardizing processes through the application of IT based solutions – automation, robotics, artificial intelligence, the Internet of things, etc. The digitalization of operations is expected to promote healthy, sustainable growth in the industry.
BM: Stepping into 2018, what issues and potentials are you looking out for?
EG: I believe that investors are still wary for a number of reasons – central bank policies, for one, have been a continuous source of uncertainty, while external events such as Brexit, the Chinese economy, and geopolitical issues, such as North Korea’s nuclear ambitions, have further distracted investors from Japanese listed firms.
Valuations for Japanese equities are currently fairly attractive. Looking forward, we expect to see steady annual earnings growth at around 10%, as firms are committed to profitability and the efficiency enhancement of production lines and supply chains, driven by the current labor shortage. Meanwhile, price hikes and industry consolidation are likely to offset the rising labor costs and bode well for the Japan equity market. BM