Morningstar analysts have reaffirmed their Gold Rating for Schroder Tokyo, which remains one of the strongest funds for Japanese equities. Andrew Rose has run Japanese-equity portfolios since the 1980s and is one of the most experienced equity managers in the peer group. He is supported by a strong and broadly stable team of Tokyo-based analysts and portfolio managers, which he headed until he moved back to London in 2006.
We believe he is adept at using the resources to his advantage, and the quality of the group's in-house research capability gives it an edge. In a nod to succession planning, analyst Masaki Taketsume relocated to London in August 2017 to work alongside Rose on this strategy. Taketsume's experience is primarily in covering IT stocks, so Rose has been working on broadening his coverage and thinking more in terms of portfolio construction.
While we welcome this succession planning, we are also reassured to see that Rose is still very much involved in the fund; he remains the lead manager and key decision-maker. Rose has adhered to the same process throughout his career. He has a forward-looking view and prefers companies that he believes have the potential to surprise on the upside over a twoto three-year period but where the market has taken a short-term negative view.
His approach is closely aligned with the methodical process used by the team backing him. Rose also displays a sensible awareness of macro trends and market behaviour, which, in our view, is a strong complement to his bottom-up stock-picking. Aside from a limit on active stock positions – plus/minus 4% relative to the Tokyo Stock Price Index – portfolio construction is unconstrained. While Rose is mindful of factor/sector exposures relative to the index, investments are generally driven by fundamental conviction. The portfolio can look quite different from the benchmark as a result – tracking error has ranged from 4% to 8% a year – including exposure to mid and small-cap stocks when they appear cheaper than large caps.
This flexibility can carry a degree of risk in the wrong hands, but Rose has deftly used it to investors' advantage. His measured approach tends to result in a nicely balanced portfolio, and the focus on valuations and fundamentals has helped keep the fund comfortably ahead of its benchmark and Morningstar Category average. We continue to have a high level of conviction in the manager, the supporting team, and the disciplined approach. The fund therefore retains a Morningstar Analyst Rating of Gold.
