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Muji, Astra bump up returns for AAA-rated manager

Muji, Astra bump up returns for AAA-rated manager

It almost sounds too simple: keep an open mind and only trust your first-hand experience. But according to Citywire AAA-rated fund manager Aisa Ogoshi, that’s the secret to success when it comes to discovering standout investment ideas that everyone else has overlooked.

Preconceptions are something that Ogoshi constantly guards against in her search for good investments. Rather than relying on sell-side reports, she insists on getting first-hand experience by speaking to the on-the-ground staff at the companies she invests in.

Her JPMorgan Pacific Securities fund takes a bottom-up, high-conviction approach and invests primarily in the securities of quality growth companies in the Asia-Pacific region, including Japan, Australia and New Zealand.

Hong Kong-based Ogoshi is on the Asia regional team within the emerging markets and Asia-Pacific equities team at JP Morgan. She is also the lead manager on the company’s Pacific Growth strategies. Ogoshi has been involved in JP Morgan’s Pacific Growth strategies for more than five years and became lead manager for this strategy in 2015. She currently manages the fund alongside Robert Lloyd.

The big idea

If you’d asked 100 fund managers at the start of 2015 to name the hot trends in retail, chances are you’d have heard the same two answers time after time: fast fashion and e-commerce.

Ogoshi, on the other hand, chose this moment to start investing in Ryohin Keikaku, the company behind the Muji brand stores. Muji, which sells a variety of household and consumer goods, definitely does not fit into either category.

What’s more, Japanese retail was not an attractive sector at that time, given the country’s ageing demographics and longstanding macroeconomic woes. However, Ogoshi was adamant that Ryohin Keikaku was undervalued compared with the likes of Inditex, which operated Zara at that time.

'We believe that Muji has overseas growth potential in that it has a very distinct style,’ she says.

Outside Japan, Muji has 418 stores, including 15 cafés and restaurants, according to the company’s website. Fast-forward a few years, and Ryohin Keikaku turned out to be one of the fund’s best performers. ‘We still hold the stock and it has been one of the biggest contributors,’ Ogoshi says.

Ideas that start out as non-consensus plays but where the fund’s thesis ultimately bears fruit are the most satisfying, she adds. When it comes to stock selection and non-consensus ideas, it has certainly been rewarding for Ogoshi to see those ideas generate outperformance over the long term.

Motoring ahead

Another non-consensus idea that Ogoshi has backed is Astra International, which is one of the largest listed stocks in Indonesia. The JPMorgan Pacific Securities fund initiated a position in the stock in the fourth quarter of 2017, despite the fact that Astra has underperformed the market and is not favoured by either local or international investors.

Astra owns both the Toyota Motor franchise in Indonesia and United Tractors – the country’s leading distributor of heavy equipment. The Indonesian conglomerate also mines coal.

Although Astra is a diversified company, the stock tends to follow the performance of the automotive business. Currently, the Toyota brand is the dominant player in Indonesia’s wholesale car market, but its market share has dropped slightly in the wake of changes to the model line-up and tough competition from rival Mitsubishi.

Nonetheless, Ogoshi is positive: ‘We believe the Astra franchise is high-quality and we like the company management. We took advantage of the valuation to add some exposure.’

Ogoshi has followed Toyota and Mitsubishi for a long time, and the thesis behind her investment is that Mitsubishi will struggle to match Toyota’s ability to keep coming up with new models.

The view is that Mitsubishi’s success is transient, while Toyota will be poised to regain market share over the next 12 to 18 months. Ogoshi is happy to wait for this to play out.

Cut from a different cloth

Another non-consensus idea that Ogoshi’s fund holds is Eclat Textile, a high-quality Taiwanese textile producer. Eclat Textile underperformed last year as a result of inventory issues impacting its main customers in US markets, but the stock has been a long-term holding for Ogoshi’s fund as she believes that quality suppliers will eventually gain market share moving forward.

‘We increased our position early this year as we have been seeing continued recovery in retail sales in the US, which should feed through into stronger revenue growth this year,’ she says.

Playing the demographics

Healthcare is an interesting theme to watch within Asian equities, Ogoshi says. The JPMorgan Pacific Securities fund has focused on the sector lately, as it benefits from some secular tailwinds. 

Populations in Asia are ageing rapidly, and the low penetration of insurance and healthcare support systems means the need for quality healthcare will be rising in the region.

‘We look across the healthcare space for equities in pharmaceutical companies, healthcare service providers, equipment manufacturers and pharmacy chains,’ she says.

In terms of the countries to watch for this theme, Ogoshi says China is a huge focus for the fund given the size of the market and the opportunity there. 

Currently, within MSCI China, healthcare accounts for less than 3% of the index, versus 12% in the MSCI World index, according to Ogoshi.

That gap alone tells investors that there is a lot of potential for interesting secular growth in healthcare in Asia, she says. Ogoshi also likes the Japanese pharmaceutical companies that were once domestic but which are now expanding overseas. The need for quality products means they are doing well in Asian markets, she adds.

Big in Japan

Currently, the JPMorgan Pacific Securities fund has a 6% overweight to Japan relative to its benchmark. ‘That’s the highest  we’ve been in the fund historically for the past five years’, Ogoshi says.

While the fund’s strategy is bottom-up and it doesn’t do top-down allocations, Ogoshi says the fund is finding ample stock ideas in Japan based on valuations and structural stories.

More importantly, the corporate governance improvement angle is a key focus for the fund in terms of boosting shareholder returns. ‘When we think about taking a bottom-up approach, we look at the long-term earnings growth trajectories for companies and consider their valuations.'

One of the fund’s holdings in Japan is a leader in recruitment. When Japan’s labour market is tight and Japanese companies are seeking higher quality hires, these stocks tend to do very well, Ogoshi says.

Trimming holdings

Ogoshi has cut down on the number of holdings in her fund to allow the highest-conviction ideas to shine. Prior to 2015, the fund had between 18 and 100 stocks. Now, the fund holds between 50 and 60 stocks. Over the past three years, the portfolio managers have continuously refined its investment discipline and its process.

‘Right now we are quite comfortable with this approach. But if we had implemented those disciplines even earlier, perhaps we could have enhanced performance,’ she says.

About 50% to 60% of the fund’s investments have a holding period of more than five years, while the remaining holdings would typically be in the fund for between one and three years.

Lessons learnt

Just like any experienced fund manager, Ogoshi has had her fair share of tough calls and regrets. One of her biggest mistakes of the past few years was an investment in IMAX China, a subsidiary of IMAX USA, which provides high-quality screen cinema systems.

The team thought it was an appealing structural story as Chinese consumers will increasingly be interested in the immersive experience IMAX offers.

However, the earnings stream of the company turned out to be strongly tied to individual movie titles, which is very hit-and-miss in nature. Ogoshi had thought the growth trajectory of IMAX China would be determined by the roll-out of cinema screens and not the titles they would be showing.

The JPMorgan Pacific Securities fund held IMAX China from its initial public offering in October 2015 until November 2017.
In the end, Ogoshi had to conclude that she had got the investment thesis wrong – that this was more of a cyclical story than a structural story – and the fund exited at a loss.

Following that experience, an automatic review is conducted of an investment thesis whenever a stock underperforms by  between 10% and 15%. ‘We will review the investment thesis and question why the stock is underperforming – is it due to a shift in the investment thesis? – and consider if we need to lower our conviction level.’

This article was published in the May issue of the Citywire Private Wealth magazine.

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