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29th July 2015

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Chris Taylor, manager of the Elite Rated Neptune Japan Opportunities fund.

Last week, Chris Taylor, manager of Elite Rated Neptune Japan Opportunities, popped into our offices for an update. He's quite a character and is renowned for shorting the Japanese equity market in 2008 – a bold move for someone who invests in that stockmarket, but one which paid off.

Chris, tell us a little bit about Neptune's research process

“Neptune's research process is quite unique. We look for an understanding of global sectors, with each manager covering a different area, looking forward over the next three to five years, identifying those sectors we think best placed to outperform. We then pick the best value companies within these sectors, focusing on which companies should do better compared with their peers around the world. We then do further analysis on our favourite companies to better understand their valuations and outlook. Each fund manager can then pick relevant geographic holdings from this pool of ideas.

“When I first started investing in Japan, companies had different accounting practices, you had to speak the language and the time difference was a nightmare, so you really needed to make regular visits to run money effectively. Today, however, that's not the case. The internet has made life a lot easier. So a lot of our research is actually carried out in London, under the same roof.”

Has quantitative easing had the same impact in Japan that it had in the US and UK?

“Quantitative Easing in Japan has been huge. To put it into context, roughly 10 times the amount of money has been pumped into the system as in the US and the economy is a third of the size. Abe wants long-term investors to move out of Japanese Government Bonds into the Japanese equity market and wants to weaken the Yen. The biggest pension fund in the country has already moved from 15% equities to 44% and the Post Office pension fund will soon follow suit.

“He's doing this because there is a real risk the country will go bust. If he can devalue the currency, profits will be boosted and the big global companies, which already pay the majority of tax, can pay more without it hurting their bottom line.”

Are we finally seeing any wage inflation?

The workforce is split roughly with 15% working for the big global companies, 15% civil servants and the rest working for small companies – the majority of which have less than 10 employees. Large companies were hurt by the strength of the yen for many years and, as a result, they squeezed the margins their smaller suppliers. This means smaller companies have not had the money to reinvest back into the business for a long time. Now the yen has devalued, Abe is urging larger companies to pass on the benefits to these smaller companies so that capital equipment can finally be replaced and productivity could potentially go through the roof and wages could also increase.

“Some sustained wage increases are crucial. Not just one year but over a period of five years or more as it will take the Japanese that long to get their confidence and feeling of job security back.

“The trouble is that Japan is trying to reverse 30 years worth of a deflationary trend and this won't happen overnight – it will take years.

“It's not just the employed that feel poor – in 17 out of 23 Japanese wards, pensioners are officially poor. This is such an issue that the fastest growing criminal section is the over 65s! The quality of life in prison is often better than at home as they have regular hot meals and a roof over their heads. It would be funny if it wasn't so tragic.”

So how is the fund currently positioned?

“The fund is focused on sectors dominated by Japanese firms who profitably exploit their multi-national client base – engineering companies, electrical and electronics businesses and those manufacturing advance materials like carbon fibre and paints. I also like those that benefit from government funding such as defense, civil engineering and construction materials companies, and those whose earnings are not dependent on yen weakness. I'm avoiding domestic demand dependent sectors such as utilities, financials and retailers.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Chris' views are his own and do not constitute financial advice.

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