Citywire AA rated Dean Cashman is backing stocks predominantly across three sectors that he believes will eventually lead to outperformance against the broader market.
Those sectors are financials (major banks, insurance companies); technology related names (consumer electronics and IT); and global basics names (specialist materials and industrials).
'Currently, the high conviction names we have identified have tended to be more cyclical in nature,' the head of Japan equity at Eastspring Investments and manager of the Eastspring Investments - Japan Dynamic fund told Citywire Asia.
'These positions were built during periods where the stocks were mispriced and out of favour with the market.'
'In recent years, the fund has benefitted significantly from holding some of these high conviction positions,' he added.
Among financials, Mitsubishi UFJ Financial is a key stock pick (6.3%), according to the fund's factsheet at the end of September.
He said the stock picks in the financial sector were examples of his contrarian approach. Apart from being well capitalised, he noted that many of the banks in Japan had low loan-to-deposit ratios and were not dependent on wholesale funding.
'Many are well placed to cherry pick international business and expand their overseas loans. In fact, some Japanese banks are already taking the lead in unexpected areas such as global project financing. On top of all this, the banks we like have good asset quality and some of the lowest market value to deposit ratios globally.'
What to avoid
One type of stock Cashman is avoiding is the defensive kind. ‘Defensive stocks may be found in consumer staples, pharmaceuticals, railways and utilities. We are finding in many cases these extremely expensive valuations are at historically high levels,’ he said.
‘Our approach avoids these unattractively valued stocks which are, in some cases, at episodically expensive levels.’
Cashman also added that with the gradually improved Japanese corporate health in the recent years, he believes conditions are now in place to offer a good investment opportunity for investors today.
'Importantly, we continue to observe improving trend fundamentals at a company level, and this is a significant driving factor in the longer term re-rating for Japan.
'We note that there are many companies in strong financial health. We observe that companies' restructuring efforts are continuing and in some cases, have accelerated. The strength of earnings improvement remains under-appreciated by the broader market.'
Over the past three years to the end of August, the fund has returned 58.99% against the Citywire benchmark Topix TR, which gained 44.21%.