Fund in Focus: Neptune goes deep to seek out sweet spots with an eye on east

INVESTORS could be excused for taking a sceptical view about the land of the rising sun being touted as the investment opportunity of the moment.

They would be even more sceptical on discovering that someone in the position of Chris Taylor, head of research for Neptune Investment Management and manager of the Neptune Japan Opportunities fund, openly concedes that the domestic economy in Japan is clearly not in good shape.

"You look at the big trends and it's obvious that they need to create enough full time jobs that are well paid enough to provide a fiscal boost in terms of the tax take," said Taylor.

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Fortunately, Taylor's fund does not rely on the domestic Japanese economy, preferring instead to invest in multi-national companies that don't rely on exports, such as Suzuki.

"Suzuki does well in its local market, selling small cars and motorbikes, but the real attraction is that it has expanded significantly into non-OECD countries," Taylor explained. "A good example of this is its 50 per cent-plus stake in Maruti, the Indian car-maker which has a 60 to 70 per cent share of its domestic market."

Neptune's "top-down" research identifies the sectors that are most likely to out-perform and then it is up to Taylor and his colleagues to find individual companies best placed to capitalise on these sweet spots.

Companies are added to the fund with a three– to five-year holding period in mind, but the manager is not afraid to take drastic action when necessary.

"In 2007, our analysis of global debt levels led us to completely sell our bank holdings and, at one point, I went to 20 per cent in cash," s aid Taylor. "In 2008, I was so concerned about the market in Japan that I put a hedge in place to guard against a decline."

The fund is relatively concentrated, with typically between 30 and 50 companies each accounting for 2-3 per cent of the fund, and each a global market leader in their industry. A major issue with investing in Japan recently has been the fall in the Yen's value. Reassuringly, Taylor said the Neptune fund is almost fully hedged against this and stands to benefit as the exports from the global brand leaders he invests in become even more attractive to the rest of the world.

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• Barry O'Neill is a chartered financial planner with Thomson Shepherd Limited (incorporating Coggans Wood)