The Fidelity Select 50 list of handpicked funds is kept under constant review by the independent consultants at Fundhouse to ensure it reflects the best-in-class options available. Following a detailed assessment, it has been decided to replace Baillie Gifford Japanese – where there has been a loss of conviction in its ability to outperform over the long-term – with Lazard Japanese Strategic Equity.
Since 2019, the fund has been managed by the highly experienced June-Yon Kim, supported by co-managers Matthew Bills and Scott Anderson, alongside a bank of four analysts. This lean structure enables them to follow a rigorous, debate-driven process that relies heavily on the judgement and skills of the individuals involved.
The team adopts a long-term, fundamentally driven, contrarian approach to identify mispriced large and mid-cap Japanese stocks. Although valuation-conscious, it is not a value fund per se, with capital allocated in a concentrated manner to the managers’ highest-conviction ideas.
Objective and approach
Lazard Japanese Strategic Equity aims to outperform the TOPIX Net Total Return index by choosing from a universe of approximately 3,000 listed stocks.1 This is whittled down using a broad liquidity screen, after which the portfolio managers and analysts have significant latitude to select their coverage of around 350 securities.
Of these, a pool of about 150 preferred companies is selected, with ideas pitched during daily meetings to identify those that offer the most favourable upside-to-downside ratio of potential returns. This enables the managers to choose the best stocks and size them according to their level of conviction.
The resulting portfolio is highly concentrated with approximately 30 securities and bears little resemblance to the benchmark. Stocks are drawn from across the large and mid-cap spectrum, with the fund having approximately £1.5bn of assets under management.
Portfolio and costs
At the end of March, the 10 largest holdings accounted for 38.98% of the portfolio, although none are household names here in the UK. The four key sector weightings were Banks, Machinery, Electric Appliances and Chemicals, each representing more than 10% of the assets.2
On a look through basis, the fund is trading on a forward price-to-earnings ratio of 15.37, compared with 16.31 for the TOPIX benchmark, and has a Return on Equity of 9.87% versus 9.26%. However, the most significant difference is the net debt to equity ratio, which at 25.04% is well below the 33.3% level of the index.3
The latest ongoing charges figure is 0.71%. This is reasonable compared to the wider peer group and offers value for money given the impressive track record.
Performance
The fund has delivered strong and resilient performance under Kim’s tenure. On a gross of fees basis, it has generated an annualised 13.2%, compared with 12.8% for the MSCI Japan Value index and 9.7% for MSCI Japan.4
Detailed analysis by Fundhouse indicates compelling evidence of skilful management, with the outperformance driven mainly by stock selection. This was broad-based, with positive contributions across most sectors rather than being concentrated in a few.
The portfolio has demonstrated impressive hit rates and strong payoff ratios over multiple periods, coupled with effective capital allocation that has favoured winners over losers. The excess return came from many different holdings and was not reliant on a handful of large successes.