The only real evolution has been to move from full to partial hedging of the yen into sterling.
“Our view is that the weakness of the yen will not be such a contributory factor to investment performance going forward as it has been in the last couple of years. We’re investing in a reactivation of corporate potential in Japan.”
Spence highlights how an extraordinary change in attitude towards shareholders has occurred.
About 15 years ago, Japanese companies began to gently increase the amount of dividends they paid. Since then, some of them have started undertaking corporate buybacks.
“More laterally, a real return on equity culture has begun to take place,” he says. “Most immediately, we’re seeing some quite interesting things happening in terms of directors and corporate governance, and flexibility in terms of boardrooms in Japan, such that western-style activist investors now have a foothold in that market they never had in the past.”
However, he sees demographics as the biggest long-term issue, which Japan has not yet fully addressed. “China has the same issue coming and we believe there is a tremendous long-term correlation between GDP rates and demographic rates.
“Time and time again in emerging markets you see worsening demographics take their toll on growth rates. We wouldn’t be the ones to say that has been fully addressed yet.”
Theory and practice
As a theoretical exercise, twice a year every member of the five-strong team rebuilds a portfolio from scratch on a blank piece of paper, selecting from the in-house-approved list of securities and managers, as if the existing portfolio didn’t exist.
Says Spence: “Everybody mustdo a forecasting of forward returns each year for the next three years on an asset class and investment basis. We get a real understanding of the spectrum of expectations and discuss why they might have gone up or down.” He translates that into a forecast level of returns for investors of around 7-8% pa.
The actual three-year annualised return for its core product has been 10% pa, having “beaten our benchmarks by a small margin but delivering less volatility – so it’s been a better real riskadjusted return”.
In market terms, Spence identifies increasing evidence of crowding into certain positions.
“The strengthening of the US dollar in the last six month swas a bit like flowers in the desert for water-starved macro investors. We see a lot of herding going on but we don’t necessarily see the buffers and liquidity in markets that would easily counter some kind of amplified shock.
“It’s not possible to identify which shock is going to come first but we know what they’re likely to be. It could be Greece at some stage. It could be emerging market debt. It could be China and its currency.
“What we do know is markets are not well buffered for these events.”
