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Fund Manager Who Beat 99% of Peers Favors Japan Local Plays

Fund Manager Who Beat 99% of Peers Favors Local Plays in Japan

(Bloomberg) -- You’ve probably never heard of Workman Co. The Japanese company, initially a little-known local retailer selling rubber gloves and T-shirts for construction workers, recently transformed itself into a booming athleisure brand. New stores opened, profits climbed and shares quadrupled.

That’s the kind of stock that helped Sophia Li make a 34% return in her Japanese portfolio for 2019 and beat 99% of peers in the past three years: locally focused, defensive plays that are relatively independent from the global economy. The fund manager at First State’s FSSA Investment Managers has been holding “purely domestic” shares to weather the impact of trade frictions, and she says the strategy will keep working in 2020.

“Normally, purely domestic companies are not on the radar of foreign investors,” Li said in an interview in Hong Kong. But “there are so many interesting companies in Japan that could generate high growth like their Chinese comparables.”

After being one of the worst performers of the developed world in the first eight months of the year, Japan’s stock market made a strong comeback, getting a further boost from the phase-one trade deal between the U.S. and China last week. While the 19% total return in the Topix index this year is already stellar, companies that generate all of their revenue from Japan did even better, surging an average 25%, according to data compiled by Bloomberg on almost 2,400 of them.

Li’s recent moves? While mostly staying with domestic-focused stocks, she also took some profit after the strong year and added cosmetic names like Shiseido Co. and Kose Corp. because of their “reasonable” valuations and improved corporate governance. She bought more shares linked to the automation of factories as she expects the sector’s earnings will recover from mid-2020.

Fund Manager Who Beat 99% of Peers Favors Japan Local Plays

Despite the great performance in the past three years, Li’s First State Japan Equity Fund has missed the recent stock rally triggered by optimism over a U.S.-China trade deal and recovering economic data -- it slipped 0.2% this month. The Topix index rose 1.8% over the period.

A potential style rotation into value and cyclical equities could be a threat as the fund is underweight those shares, Li said last week. The recent Sino-American trade agreement may fuel a rebound in the style, including in deep-cyclical stocks that she doesn’t own.

That said, Li expects such a rotation to be short-lived, as the deal may just be a “temporary solution” rather than a cure for more fundamental issues: The world is getting into an era of de-globalization, and the central-bank easing policies of the past decade have failed to shore up inflation.

“Protectionism is everywhere in the world,” Li said. “They could rebound for how long? A few weeks or a few months? But will it be a multi-year investment case? I doubt so.”

To contact the reporter on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Cecile Vannucci, Margo Towie

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