Jason Stipp: I'm Jason Stipp for Morningstar. On Tuesday we saw a second big day of declines in the Japanese market. I'm checking in today with Charles de Vaulx. He's a portfolio manager with IVA Funds. He has a good weighting in Japan stocks, and I wanted to get his take on the situation in Japan and where he's seeing the future for that particular market.
Thanks for calling in today, Charles.
Charles de Vaulx: You're welcome, Jason.
Stipp: First question for you, we have seen Monday and Tuesday, very severe selling in the Japanese market. I wanted to get your sense as an investor who has holdings in that market, how much of the selling that we're seeing is due to a real fundamental loss of value due to the disasters that we saw there, and how much is so-called panic selling of people just wanting to get out of the market indiscriminately?
de Vaulx: I believe it's mostly panic selling in the sense that some companies will actually experience a permanent impairment of capital, but right now, it's too early to tell which companies will be affected the most and by how much.
So, yes, to some extent, the selling has been exaggerated, but we have found that it was not totally indiscriminate. In fact, our holdings, believe it or not, have held up better than the market as a whole.
Stipp: So, I just wanted to dig in a little bit on your holdings. So, I know that you have in the IVA Worldwide portfolio about 13% in Japan. You've obviously seen value there before. As you're looking at your holdings in Japan right now, what's your sense of the value proposition there? Have some of them gotten more attractive and you might be considering adding to them? How are you assessing your portfolio holdings, in short?
de Vaulx: At the end of February we had 13.8% in Japan in our Worldwide fund, and basically over the past two days what we have been doing is that we have been buyers, mostly adding to existing names, with the exception of one new name, a consumer goods manufacturer that we had hoped to be able buy at one point, and basically, whatever buying we've been doing is just enough to offset the fact that our Japanese stocks have lost 9% on average while the TOPIX has been down 16.3% over the past two days. So, we're just maintaining our same weighting if you will.
Stipp: What would you say is responsible for the fact that your portfolio holdings have held up better than the market averages in Japan? What particular qualities of those companies have allowed them to weather the crisis better than others?
de Vaulx: The stocks that had been hit the most are stocks that we do not own, such as the non-life insurance companies, the electric utilities, obviously, or the railroads. Conversely, what we own in Japan are very well capitalised companies with very strong balance sheets and with very high return on capital businesses.
In fact, our two largest positions are Astellas Pharma, the pharma company, and SECOM, the electronics securities service company, and those stocks are down but have held up better because they should be a lot less affected by the earthquake than some of the other businesses out there.
Stipp: I know it's hard to say, Charles, obviously, no one exactly knows how the situation is going to unfold. Are you anticipating that we're going to see, however, some more volatility in this region? Do investors need to hold on to their hats for the time being?
de Vaulx: Either hold onto their hats or buy into specific Japanese names but controlling risk through having a reasonable-sized exposure. We would be tempted to have a lot more in Japan, but we are exercising restraint. We want to control risk by not having an outsize position. Again we'd be cautious there.
We should not also forget that Japan, of course, is a huge topic, but Japan will also be affected medium to long term by what's going on in China, whether it will be a soft landing or a hard landing. Japan will be affected by the economy in the U.S. and Europe. So, I think caution--I think you both have to buy certain stocks, but you have to be cautious. We still hold some gold, for instance. We do worry about interest rates rising over time in Japan, so we have a small short position, where we have shorted JGBs in Japan, in case interest rates go up. So, you have to be selective.
Stipp: Last question for you, as we look forward assuming that Japan--and we all hope that they will be able to stabilise the situation, particularly with the nuclear power plants--has the outlook for the Japanese economy changed at all in your view because of the rebuilding that they're going to have to do and changes that might need to come along with that? Are there any new opportunities or potentially any new areas to be more cautious about as you see this economy rebuilding itself following the disaster?
de Vaulx: Yes. I mean, you're right. Some sectors, construction related, will be helped. One of our stocks Kanamoto was up sharply on that basis, but conversely, again, especially if the Chinese economy slows down, some export-oriented companies in Japan may be hurt as well. So, I think, again, it's a sort of a one company at a time type of analysis, and more than ever price matters, and trying to assess worst-case scenarios for the companies we'll be looking at.
Stipp: Okay. Charles de Vaulx, thanks so much for your time today and for offering insights on investing in Japan. I appreciate you calling in.
de Vaulx: You're welcome. Bye-bye.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.
