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Aberdeen Japan Equity Fund Annual report to 30 September 2014

Performance Review The Aberdeen Japan Equity Fund rose by 4.59% in Singapore dollar terms for the year under review, compared to its benchmark, the Topix Index’s total return of 3.03%.

Market Review Japanese equities posted healthy gains over the review period. Initially, stocks were supported by a weaker yen and optimism over Abenomics. Market sentiment was also boosted by the cabinet’s plan to lower corporate taxes and anticipation that liberalisation of Japan’s public pension fund, GPIF, would increase its exposure to domestic equities. Investor confidence also strengthened following solid corporate earnings releases, as well as expectations of further economic stimulus. However, the positive market gains weren’t reflected on the macroeconomic front - data releases were disappointing as the consumption tax hike in April continued to weigh on sentiment. In particular, second-quarter GDP shrank by 1.7% from a quarter earlier, while exports fell, widening the trade deficit in turn. Although some major Japanese companies raised wages for the first time in years, the hikes lagged the rise in consumer prices.

The weaker yen was a double-edged sword. While it contributed to the improved outlook among large manufacturers in theSeptember-quarter, those that relied on the domestic economy did poorly. For example, the services sector suffered a loss in confidence, while small and medium enterprises were affected by higher import costs, which resulted in a greater number of bankruptcies. We will be keeping an eye on this trend, as well as significant political developments. Notably, prime minister Abe reshuffled and replaced two-thirds of his cabinet, as the administration attempts to regain momentum for third-arrow reforms.

Portfolio Review At the stock level, top contributors to relative return included our health care holdings Chugai Pharmaceutical and Astellas Pharma, which benefited from optimism over their drug pipelines and expectations of a more favourable regulatory environment. Astellas Pharma was also lifted by a share buyback. Daito Trust Construction was also boosted by a buyback of up to 1.71 million shares, which brought overall shareholder returns to around 80% of net profits. The company declared a commemorative dividend of ¥20 per share in fiscal year ending March 2015.

Against this, key detractors included vehicle parts manufacturer FCC and Yahoo Japan. FCC fell on concerns over weak demand for its motorcycle components in emerging markets, while Yahoo Japan suffered from worries over the growth of its core advertising business.

In portfolio activity, we initiated positions in Denso, one of the world’s largest car parts supplier, and Aeon Financial Services (AFS), a credit card and consumer financial services provider. Originally a unit of Toyota Motor, Denso has successfully diversified its business and is now a leading supplier of advanced automotive technology and components for major manufacturers. With its scale and solid balance sheet, Denso is well positioned to weather the challenges within the industry. With regards to AFS, it benefits from a firm base to market its products, thanks to its parent company Aeon Co., while its merger with Aeon Bank enables it to lower its funding costs. Additionally, AFS has a good track record of building its businesses across Asia.

We also introduced air conditioning equipment manufacturer Daikin Industries and Suruga Bank. Daikin has a solid global presence, particularly in China, where its environment-friendly range is popular. Suruga Bank is a regional lender that pursues a deliberate strategy of lending to those that have difficulties gaining access to credit through ‘traditional’ commercial banking channels. Through its unique customer focus where it sees limited competition, Suruga Bank earns the highest margins in the industry. The bank has a strong track record of keeping credit costs low, thanks to its proprietary automated screening system.

Against this, we sold Takeda on the back of concerns over ongoing lawsuits against the company for its diabetesdrug,Actos, as well as increasingthreatsto its currentdrug portfoliofrom generic manufacturers.

Source: Aberdeen Asset Management Asia Limited The performance returns are sourced from Lipper, based on percentage growth, calculated on a NAV-to-NAV basis with gross income reinvested.

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