Martin Currie Japan
We welcome the recent upturn but sustainability is needed to make this a strong choice.
The fixes led to the introduction of a quantitative tool to filter the Topix Index and formalised the team's approach to examining operating profit margins. They now have a more systematic way to detect improvements or deterioration in margin trends. Millar believes margin analysis is particularly relevant with manufacturing firms, which account for a large proportion of the index. He thinks it is vital to consider when earnings are sensitive to capacity utilization and that the market consistently underestimates operational leverage. That said, he admits the approach does not work equally well in all sectors and alternative research tools are at his disposal to analyse areas such as petrochemicals.
Millar's review also led the team to give up their generalist mode of research in favour of a specialist style, to help execute the process more efficiently. We think this will render greater accountability to the squad and he has also improved their working relationship with the firm's global analytical resource; he thinks investors ought to consider both overseas and local competition when making price comparisons among firms. The rest of the qualitative analysis conducted by the team has remained unchanged. So, when a positive change in operating margins is identified, the team then evaluates whether the firm is well run, produces strong top-line earnings and cash flow growth and trades at a reasonable price. Valuation tools they use include PE/PB/PCF ratios and discounted cash flows to stress test earnings.
The portfolio resulting from this process favoured, as at Dec 2008, domestic plays as the global economic slowdown meant bad news for export-orientated firms' margins. That helped the fund's annual return, which landed just outside the category's top quartile, but performance since Millar assumed sole charge in July 2006 lags both the Morningstar category and benchmark index.
While we acknowledge the recent strong results, it is too short term for us to draw any meaningful conclusions and its sustainability could be hindered by a few factors. We think some of this team's good work is being undone by the inordinately high portfolio turnover, which is 252% over 12 months to September 2008. At 1.7%, the fund's TER is already on the high side and trading costs (which are not included in the TER) from so much turnover can be significant. We think the fund is moving in the right direction and we think highly of Martin Currie in general, but this can't yet be counted among the category's best.
