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Japan – 12 months on
Simon Somerville
April 2012
For professionals only
Citywire Amsterdam Event – 19th April 2012
OFUNATO,
Iwate prefecture
TOSHIFUMI KITAMURA/
AFP/Getty Images
March 14, 2011
January 15, 2012
KESENNUMA,
Miyagi prefecture March 16, 2011
January 14, 2012
PHILIPPE LOPEZ/
AFP/Getty Images
3
The Long Road to Recovery
Source: Bank of America Merrill Lynch as at 31.12.11
Industrial production index (2005=100) Industrial production index (yoy, %)
80
82
84
86
88
90
92
94
96
98
100
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
2010 2011
Earthquake
(Mar. 11, 2011)
Thai floods
-20
-10
0
10
20
30
40
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112
2010 2011
Earthquake
(Mar. 11, 2011)
Thai floods
Current Role Fund Manager, Far Eastern Equities Team
Current
Responsibilities
Manager, Japanese portion of the Jupiter Global Managed
Fund (Unit Trust), Deputy Manager of Jupiter Japan Income
Fund (Unit Trust) and Jupiter Japan Select (SICAV)
Jupiter Japan Team
4
Fund Manager:
Simon Somerville
Fund Manager:
Dan Carter CFA
Source Jupiter, S&P, OBSR as at 28.02.12.
Focused, UK-based team gives perspective, flexibility and performance
Funds AUM
Jupiter Japan Income Fund Unit Trust £498m
Jupiter Japan Select SICAV £50m
Jupiter Global Managed Unit Trust £268m
Total £816m Current Role Joint Head, Far Eastern Equities Team
Current
Responsibilities
Manager, Jupiter Japan Income Fund (Unit Trust) and
Jupiter Japan Select SICAV and Jupiter Global Managed Fund
Jupiter’s Asian Equities Team
Dealers
David Flanagan
Carl Westover
Jeremy Griggs
Front Office Admin
3 dedicated
support staff
India
Avinash Vazirani
Amelie Thevenet Asia
Philip Ehrmann
Ben Surtees
Japan
Simon Somerville
Daniel Carter
Since launch
Jupiter Japan Income 22.4%
Sector rank 4 / 42
JGF Japan Select 17.7%
Sector rank 32 / 100
Since launch
Jupiter India 31.4%
Jupiter India Select -2.6%
Sector rank 8 / 29
Since launch
Jupiter China 59.2%
Sector rank 11 / 15
Jupiter Asia Pacific 121.7%
Sector rank 17 / 69
Source: FE, to 31.03.12. Jupiter India Fund launched 31.03.08 (figures in £), Jupiter Global Fund SICAV India Select launched 02.05.08 (figures in $), Jupiter China (Acc) Fund launched 20.10.06 (figures in £), Jupiter Global Fund SICAV Asia Pacific launched 21.12.04 (figures in $), Jupiter Japan Income Fund launched 15.09.05 (figures in £), Jupiter Global Fund SICAV Japan Select launched 01.07.09 (figures in $). Past performance is not an indicator of future performance.
Strength and resource in Asia
5
Investment track record
Jupiter Japan Income performance
Source: FE, bid to bid, net income reinvested to 31.03.12. Past performance is not an indicator of future performance. Jupiter Japan Income fund launched 15.09.05 (figures in £). Jupiter Japan Select SICAV launched 01.07.09 (figures in $).
Strong and consistent investment performance
Jupiter Japan Select SICAV performance
1 year
%
Since inception
%
JGF Japan Select -1.67 17.70
Topix 1.31 14.92
Outperformance -2.98 +2.78
1 year
%
3 years
%
5 years
%
Since inception
%
Jupiter Japan Income Fund -0.24 28.19 3.19 22.42
Topix 1.64 26.29 -3.06 9.96
Outperformance -1.88 +1.90 +6.25 +12.46
6
Jupiter Japan Select SICAV
Cashflow and strong balance sheets are key
Companies improving corporate governance will be rewarded
Identification of themes / sectors and stocks within these
is important
Communication with companies is vital
Concentrated portfolio – so know what we own extremely well
7
Investment philosophy
Jupiter Japan Select SICAV
8
Investment process – looking for alpha
Cashflow is key. Screen for growth, valuation and momentum
using Holt CFROI
Technical analysis aids timing decisions
Seeking companies with strong fundamentals
Domestics with strength of franchise
Exporters with defendable intellectual property
Make direct contact with 300+ companies per year
Focus on understanding companies and their drivers
(macro themes)
Stock selection – 4 steps
9
A disciplined approach
Politics
The Debt
Deflation
Companies The economy
The Yen
Demographics
What’s Wrong with Japan
10
Basically a lot! But there is hope!
11
Is there hope for Japanese politics after all?
Hideaki Omura – Governor of Aichi
Former LDP Diet member –
now independent
Founded party to promote
decentralisation
Seeks alliance with Hashimoto
Shintaro Ishihara – Governor of Tokyo
Extremely popular –
now in fourth term
Known for controversial views
Has cut metropolitan spending,
promoted growth
Toru Hashimoto – Mayor of Osaka
Extremely popular at
the grassroots
Urges private sector growth
and public sector efficiency
Displays a “healthy contempt”
for central government
Naomi Koshi – Mayor of Otsu
Japan’s youngest ever
female mayor
Harvard Law School Grad
Represents the changing face
of Japanese politics
Yoshihiko Noda – Prime Minister
Proposes consumption tax hike
The best PM since Koizumi?
Popularity of PM and major
parties is low
Is the bond market telling us something about inflation?
12
Source: Mizuho 07.02.12.
10.0
10.5
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
Jan 11 Apr 11 Jul 11 Oct 11 Jan 12
Japan BEI inflation expectation (LHS)
TOPIX 12M forward PER (RHS)
%
0
200
400
600
800
1000
1200
1400
1600
1800
2000
-4
-3
-2
-1
0
1
2
Jan 05 Jan 07 Jan 09 Jan 11
Japan BEI inflation expectation (LHS)
TOPIX (RHS)
%
BEI = break-even inflation rate as derived from Index Linked JGBs
13
Japan's tax nightmare
Source: Nicholas Smith.
Robert Feldman’s Unscientific Survey
14
What do the people want?
Source: Morgan Stanley February 2012
A B C D E
Consumption tax rate 5% 10% 15% 20% 25%
Total spending -20% -15% -10% -5% 0%
Fiscal savings ¥40tr ¥40tr ¥40tr ¥40tr ¥40tr
Preference of the young,
urban, private sector
Older, regional and public
sector preference
Is this what matters?
Source: Bloomberg as at 28.02.12.
Yen weakens,
market rallies
15
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
5
10
15
20
25
Jan 90 Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
Won - Yen exchange rate (LHS) Nikkei 225 stock average (RHS)
16
Japan Baby Boomers!
Source: MHW, National Institute of Population and Social Security Research.
Japan total fertility rates
1.0
1.2
1.4
1.6
1.8
2.0
2.2
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Actual
NIPSSR 2006 Projection (High)
NIPSSR 2006 Projection (Medium)
NIPSSR 2006 Projection (Low)
NIPSSR 2012 Projection (High)
NIPSSR 2012 Projection (Medium)
NIPSSR 2012 Projection (Low)
17
Demi-Ashton ratio
Source: Deutsche Bank. Demi-Ashton ratio = population in the range 40 to 49 years/population in the range 20 to 29 years.
50%
70%
90%
110%
130%
150%
170%
0
500
1,000
1,500
2,000
2,500
3,000
1950 1970 1990 2010 2030 2050
TOPIX Demi-Ashton
50%
60%
70%
80%
90%
100%
110%
120%
0
200
400
600
800
1,000
1,200
1,400
1950 1970 1990 2010 2030 2050
S&P 500 Demi-Ashton
Sony – Japanese restructuring!
18
-4
-3
-2
-1
0
1
2
3
4
5
6
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011
($b
n)
Operating Profit Restructuring Charges Net Profit
135000
140000
145000
150000
155000
160000
165000
170000
175000
180000
185000
No
. o
f em
plo
yee
s
No. of Employees
Source ML, Sony as at 31.12.11.
1
9
Japanese Equities
Where have the Banks Gone?
Mitsubishi Tokyo Financial (¥6.1tr)
Mitsui Sumitomo (¥5.8tr)
UFJ (¥3.2tr)
Mizuho Financial (¥4.8tr)
Daiwa Bank (¥2.6tr)
Industrial Bank of Japan (¥15.9tr)
Sumitomo Bank (¥11.6tr)
Fuji Bank (¥10.7tr)
Daiichi Kangyo Bank (¥10tr)
Mitsubishi Bank (¥9.6tr)
Sanwa Bank (¥8.2tr)
Long Term Credit Bank (¥6.6tr)
Tokai Bank (¥5.3tr)
Mitsui Bank (¥4.6tr)
Bank of Tokyo (¥4.0tr)
Taiyo Kobe Bank (¥3.7tr)
Nippon Credit Bank (¥3.2tr)
Hokkaido Takushoku (¥1.5tr)
1
9
9
0
2
0
0
1
¥97.5tr - 80% = ¥19.9tr
Source Cazenove 31.12.01.
2
0
Japanese Equities
Source Cazenove/Jupiter as at 31.12.11.
21
How banks perform in a crisis
Source: Bloomberg, 03.02.12.
30
40
50
60
70
80
90
100
110
Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12
Banks rel to TOPIX Banks (KBW Index) rel to S&P Banks Rel to DJ Eurostoxx
22
Outlook for 2012
Earthquake – Stronger Yen –Thai floods – Olympus. 2011 not a vintage year
Dividends – encouraging that companies have maintained and even increased
Politics – New PM Noda is saying the right things. Action speaks…
The BoJ finally walking to the rescue?
The yen is hurting corporate Japan
Inflation is key measure to watch. Steady inflation good for Japanese equities
2012 – muted growth globally but rebuild in Japan should support domestic economy
Bank of Japan slow to act – lot to do
23
Source: Haver Analytics, DB Global Markets Research 31.01.12.
Central bank's total assets
0
1
2
3
4
5
6
7
8
9
10
01 02 03 04 05 06 07 08 09 10 11 12
Japan US Euro area UK
% o
f d
om
esti
c n
on
-fin
an
cia
l sec
tor
liab
ilit
ies
Asset purchases now 90% of
JGB monthly issuance –
greater that Fed’s peak 80%
Political pressure for change.
Governor replaced next year.
Five board members replaced
within 13 months
Inflation goal is now a target set
at a sensible 1%
24
Japanese market valuations
TOPIX ROE and PBR from January 03 to December 11. Source: Mizuho Securities Equity Research.
0.5
1.0
1.5
2.0
2.5
3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%
TO
PIX
PB
R
TOPIX 12 month forward ROE (I/B/E/S consensus)
We are here
y = 14.796x + 0.1616
R² = 0.6472
-30
-20
-10
0
10
20
30
40
50
60
15 17 19 21 23 25 27 29
% c
han
ge
% annualised volatility
Jupiter Japan Income Fund
Volatility / return over 5 years
Source: FE, bid to bid, net income reinvested to 31.03.12. Past performance is not an indicator of future performance.
TOPIX
IMA Japan sector average
25
Portfolio overview
Number of holdings 43
Fund size $79 million
Top 10 37.3%
Fund statistics
Top 5 sector weightings
Market cap split
Jupiter Japan Select SICAV
Sector % Weight
Financials 24.3
Industrials 24.1
Consumer Goods 19.6
Consumer Services 10.9
Technology 6.5
Source: Jupiter as at 28.02.12.
Holding % Fund
Canon 4.6
Sumitomo Mitsui Trust Holdings 4.4
Honda Motor 4.4
Sumitomo Mitsui Financial 4.3
Mitsubishi 4.1
Top 5 holdings
26
Summary
27
Jupiter
Japan
Key to watch
A focus on quality companies, management, franchise and cashflow
Underowned, undervalued and maybe changing
Inflation, the yen and Japanese politics
Appendix
Introduction to Jupiter
Assets under management Established in 1985
437 employees including
68 Investment Professionals
One of Europe’s most successful and
respected fund management houses,
managing assets of £22.8bn
Market cap £1bn*
Source: Jupiter 31.12.11. *Source: Bloomberg as at 31.12.11.
29
30
Overall investment philosophy
Talented team Investment approach
Fundamental investment approach
Entrepreneurial approach with institutional resources
Individual fund manager accountability and risk control
Low fund manager turnover
Equity participation aligns interests
Exclusively active management
Fund Manager autonomy
No committee driven approach to investing
Focus on companies
Concentrating on ‘best ideas’
Direct company contact is key (up to 150 company
meetings p.a. per fund manager)
Quantitative analysis to assess correct valuation
Robust stock selection and disciplined portfolio design
Risk management integral to investment process
31
Percentage share of export value by region Operating profit by region
0%
10%
20%
30%
40%
50%
60%
70%
1q83 1q85 1q87 1q89 1q91 1q93 1q95 1q97 1q99 1q01 1q03 1q05 1q07 1q09 1q11
Export to US Export to EU Export to Asia
Asia is Japan’s driver now
(2003–2011)
Source: MOF / Nomura.
32
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
OECD Leading Indicators (lhs) Japan rel to MSCI Global (rhs)
The Yen has reduced Japan’s cyclicality
Source: OECD, Bloomberg, MSCI, 31.01.12.
33
Weakening yen leads to inflation
Source: Bank of America Merrill Lynch 31.01.12.
-20
-10
0
10
20
30
40-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Yo
Y %
Yo
Y %
US-style core CPI (YoY, LHS) Effective exchange rate of JPY (YoY,lagged 15 months, RHS, reversed)
Weaker yen
How worried should we be about Japan’s debt?
Source: Cabinet Office / Daiwa / Mizuho.
-10%
-5%
0%
5%
10%
15%
20%
1980 1984 1988 1992 1996 2000 2004 2008
Corporate sector Household sector General government
Net savings by sector as % of GDP
G7 public sector debt in 2010 as % of GDP
Corporate finances have
improved over time…
…but the government’s
balance sheet has worsened
Japan’s total sovereign
debt is scarily high…
…but low yields make
it cheap to fund
34
Components of GDP
35
Source: ESRI 31.08.11.
Real Gross Domestic Product (seasonally adjusted series)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
%
Public works as % of GDP Private sector capex as % of GDP Private Housing as % of GDP
Great Hanshin Earthquake January 1995
Exports as % of GDP in 2010
36
Source: OECD.
0
10
20
30
40
50
60
70
80
90
100
US Japan Spain UK France Italy Canada Switzerland Germany Korea Netherlands Belgium
37
Your Jupiter contact in the Netherlands
Sophie Robé, CFA Director ,
Jupiter Asset Management
Current Role Sales Director
2006 – present Jupiter Asset Management
Director, Hedge Funds Advisory Group,
Sales director, Nethrelands
2002 – 2006 Jupiter Asset Management
International Sales Executive, Senior Manager
1997 – 2001 Commerzbank Asset Management, Germany
Vice President, Senior Project Manager, Product
development (2000 – 2001); Head of Quantitative Equity
Analysis, Research (1999 – 2000); European Sector
strategist (1997 – 1999)
1993 – 1997 University of Kassel, Germany
Researcher in Portfolio Theory and Econometrics
Qualifications PhD in Finance
Economics (University of Kassel)
Chartered Financial Analyst
38
Disclosure
Jupiter Asset Management Limited (‘JAM’) is registered in England and Wales (no. 2036243).
The registered office is 1 Grosvenor Place, London SW1X 7JJ. JAM is authorised and regulated by the
Financial Services Authority whose address is 25 The North Colonnade, Canary Wharf, London E14 5HS.
This presentation is intended for investment professionals and not for the benefit of private investors.
However any one attending the presentation or who has the opportunity to view the accompanying slides
should bear in mind that the value of an investment in a unit trust and the income from it can go down as
well as up. It may be affected by exchange rate variations and you may not get back the amount invested.
Initial charges are likely to have a greater proportionate effect on returns if investments are liquidated in the
shorter term. Quoted yields are not guaranteed. Current tax levels and reliefs will depend on the nature of
the holding and details are contained in the key features documents. Past performance should not be seen
as a guide to future performance.
This document contains information based on the MSCI, MSCI Global Indices. Neither MSCI nor any other
party involved in or related to compiling, computing or creating the MSCI data makes any express or implied
warranties or representations with respect to such data (or the results to be obtained by the use thereof),
and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of
the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to
compiling, computing or creating the data have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such
damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express
written consent.
For your security we may record or randomly monitor all telephone calls. If you are unsure of the suitability
of an investment please contact your financial advisor. Any data or views given should not be construed as
investment advice. Every effort is made to ensure the accuracy of the information but no assurance or
warranties are given.
38