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Strategy reminder

BL Equities Japan adheres to BLI's equity investment philosophy known as ‘business like investing.’
This implies that we perceive businesses like company owners and invest in quality companies for which we identify long-term potential for profitable growth. The strategy also aims to mastering risk through a strict investment discipline based in particular on valuation.

Structuring the portfolio efficiently in terms of diversification helps to master risks and streamline investment decisions.

Thus, to ensure sufficient diversification, Steve Glod strives to maintain a good balance between companies with a more global exposure and those that are mainly present in the domestic market.

Diversification is also achieved by classifying companies according to their risk/return profile:

  • The ‘Consistent Earners’ represent the backbone of the portfolio (> 50%). The focus is on business stability.
  • The ‘Established Values’ are companies whose activities face particular situations that can lead to a very attractive valuation.
  • ‘Growing Franchises’ are companies with stronger growth, often niche players with company specific growth drivers.

During the year, the Fund was awarded the independent French label ‘Label ISR’ attesting to the solidity of the ESG approach implemented in the portfolio.

2022 Performance Overview

* Note: Cumulative performance net of fees (B share) in yen. Past performance is not a guide to future performance. Source: Lipper.
  YTD1 MTD1
BL Equities Japan B Cap -2.48% 5.56%
MSCI Japan NR JPY 2.30% 4.56%

Since the beginning of the year, the BL Equities Japan Fund has a disappointing relative performance compared to the MSCI Japan NR index. However, this underperformance should be put into perspective as the Fund outperforms Japanese equity funds with a quality growth bias similar to BL Equities Japan.

The chart below clearly illustrates the dispersion of year to date returns across the Japanese universe, based on investment styles and underlying sectors, relative to the performance of BL Equities Japan2 .

Graphique 1

The year can be divided into two distinct periods:

  • January to May: The Japanese equity market corrected sharply against a backdrop of tense geopolitical and global macroeconomic conditions. It was mainly quality and growth stocks in which the Fund is heavily invested that were penalized while the value segment and the financial sector fared well. At the same time, defensive stocks, especially Consumer Staples (which account for around 25% of the portfolio), did not really hold up.
  • The Fund's more defensive positioning did not make the difference, causing the strategy to underperform in a declining market environment, which is unusual for our investment style.
  • Since June: The situation has stabilized and in the last two months, the Japanese equity market has posted positive performances. In this context, defensive and less volatile stocks regained some colour, allowing the Fund to reduce its relative underperformance.

Positioning

In line with its investment philosophy of favouring quality companies that can generate long-term returns while reducing portfolio volatility, the Fund remains relatively cautious, especially given the current unfavourable macroeconomic environment.

This cautious positioning was already visible in 2021 with a reduction in the weighting of high growth stocks classified as ‘Growing Franchise.’

Since the beginning of the year, the Fund Manager has adopted a dual strategy aimed at

  • 1) Gradually and selectively increase the weighting of growth stocks (Growing Franchise) by taking advantage of the weakness of their prices; whether by strengthening existing positions or buying new positions. For example, the Fund Manager invested in new stocks such as Daifuku (industry, process automation solutions), Misumi Group (industry, supplier of electronic products and mechanical components for the manufacturing industry) and Nomura Research Institute (IT, company consulting and technology solutions)
  • 2) Strengthen more defensive stocks that could help the portfolio to remain stable. Over the past month, he has invested in Lion (consumer staples, leader in the oral products market), Shiseido (consumer staples, world leader in cosmetics) and Japan Exchange Group (finance, operator of several Japanese stock exchanges).

Thus, the weighting of ‘Growing Franchise’ stocks is now at its highest level since the end of 2020, this rebalancing having taken place at the expense of the ‘Established Value’ and ‘Consistent Earners’ values which had resisted better in the recent decline. However, the latter still constitute the majority of the portfolio.

Graphique 2

In terms of the balance between export and domestic stocks, the breakdown has remained relatively stable in recent months. Indeed, two opposing trends were at work prompting the Fund Manager not to change the balance in place. Normally, in a difficult global macroeconomic environment, domestic stocks tend to be more resilient, but the current weakness of the yen has favored exporting companies.

In the coming months, the manager should maintain his cautious positioning, particularly on more cyclical industrial stocks; if the overall environment continues to deteriorate, the yen, a safe haven, should appreciate again; this favorable factor should therefore gradually disappear.

1 Data as at 25 November 2022.
2 Data from 12/31/2021 to 11/28/2022. Past performance is not indicative of future performance. Source : Bloomberg.

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