M&G Japan

M&G Japan invests in Japanese firms of any size. The team concentrates its efforts on really getting under the skin of the businesses it looks at, which adds value in an esoteric market like Japan, and leads to a concentrated portfolio of companies of which they have a real in-depth understanding. The fund is concentrated, with typically fewer than 50 holdings, which are invested over all market caps, although the fund is overweight small and mid-caps.

Our opinion

Carl is passionate and extremely knowledgeable about the Japanese market. He really understands the businesses in which he invests and their drivers, undertaking a great deal of in-depth research. This is combined with a strong understanding of the Japanese culture, which is key to successful investing there. His passion for the stocks in which he invests is tempered by having a close eye on risk and analysing the risk/reward with each investment. The fund has a slight value bias and has consistently outperformed under Carl’s tenure.

Fund manager

Fund manager Carl Vine is based in London, alongside deputy fund manager David Perrett. Carl is responsible for running the company’s Japanese portfolios, and David runs the Asia funds. Carl has over 20 years’ investment experience, having begun his career with Prudential in London, then relocating to Tokyo to open the Japan office. He went on to work in Hong Kong for SAC Capital Advisors and UBS. Carl and David co-founded boutique investment firm Port Meadow Capital in 2014, both subsequently joining M&G in 2019 as co-heads of Asia Pacific Equities. The two managers have worked closely together for many years and are supported at M&G by a team of eight analysts and other investment specialists. Analysis is run regionally within this team.

Carl VineFund manager

Investment process

The team’s research covers the entire benchmark index - MSCI Japan Index - but it focuses mainly on a core universe of around 250 stocks that have been closely followed over many years. All team members, including the fund managers, have analytical responsibilities for stocks within the fund’s universe.

The managers aim to understand how a company works, how it generates profit, whether those returns are sustainable, what is the potential upside and downside and what its value proposition is. This enables them to understand the context of the company within its industry sector to get a full picture of its business outlook. Regular meetings are held with company management teams, both in London and Japan.

By maintaining a rich and consistent dialogue with companies in the universe, the managers find that they frequently develop insights and ideas that are not thrown up by numeric-based screens. One member of the investment team - Dr Ryohei Yanagi - is the consultant for Japanese Corporate Engagement, highlighting the importance of this aspect of the process.

The team’s stock-picking approach aims to identify a large, exploitable gap between the price the market ascribes to a stock and its own estimated value of that stock, based on proprietary research. The managers will only invest when they have absolute conviction.

The investment process is based on the principle that there are four key elements of the ‘investment problem’: independence, conviction, fallibility and uncertainty. Independence is addressed with differentiated idea generation – the team wants the portfolio to stand out from other portfolios. Lack of conviction will increase the chance of making the wrong investment decision at the wrong time, which can be avoided with thorough research of a consistent universe of stocks. Fallibility refers to the unavoidable reality of getting it wrong. The team has to ensure that its approach thrives despite this, by insisting on margin-of-safety before investing and a system to identify potential losers after it invests. Uncertainty addresses the fact that most of the value of securities lives in an unforecastable future. The team can’t predict the future, instead it focuses on pricing risk through a probabilistic framework.

The managers are long-term investors, but when they realise that they have got a stock decision wrong, they will exit that stock and move on. They constantly re-evaluate their investment decisions and rationale, irrespective of whether a position is in profit or in loss, and they are not afraid to sell at a loss, or double down.

The investment style is neutral, however the cautious approach pushes it towards value, even though key aspects of the investment and thought processes differ from those of a typical value manager.

ESG

ESG - Integrated
M&G has clear and defined categories for the ESG focus of its fund range. There are also some company-wide exclusions for all funds, such as cluster munitions. M&G believes that ESG factors can have a material impact on long-term investment outcomes, so it considers such factors as a fundamental component of their investment process. As well as identifying risks, understanding ESG can also be a source of returns, whereby a firm with a product or service that is a solution to ESG issues may have improved fundamentals as it capitalises on this opportunity. The team uses a proprietary, firm-wide system for scoring ESG. This not only helps with thought leadership, but also supports monitoring and engagement after investment.

Risk

Managing risk is integral to the investment approach, with the team maintaining a constant balance between stock picking and risk navigation. Stock-specific risk is expected to account for most of the fund’s risk. The team monitors correlations among portfolio holdings and among key underweights to stay on top of diversification levels.

A separate risk team provides ongoing analysis to assess the fund’s behaviour in various market scenarios and challenge decisions. However, it is the fund managers who are ultimately responsible for the risk management of the fund. The managers recognise that bottom-up portfolios often result in sector biases, so they will limit a position if they feel that the sector bet is outsized or unintended. Active risk positions at single stock level typically range from 0.5% to 5%.

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