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The UK magazine Citywire Selector has interviewed Steve Glod, the manager of our fund BL-Equities Japan, about the facts that Japanese investors seeking safety in indices are missing out on major opportunities in quality companies and mid-caps and that Japan ETFs do not make sense.

Japanese investors seeking safety in indices are missing out on major opportunities in quality companies and mid-caps, according to Citywire AA-rated Steve Glod.

Speaking to Citywire Selector, Glod, who runs the BL-Equities Japan fund, said more and more investors are using ETFs for core exposure in markets such as Japan and the US.

‘One of the reasons may be because everyone always says it’s very difficult to beat the S&P and the Topix. Investors have wanted to be on the safe side, but I am convinced that in Japan ETFs don’t make sense in the long term.’

Glod currently has around 40% of the fund exposed to mid-cap companies and said, before 2012, many investors had played Japan as a value opportunity.

‘People tended to invest in companies because they were cheap, no one was really investing for the long term, but we are convinced this is changing. But for this to happen you have to buy the right companies, and with that in mind, it doesn’t really make sense to buy ETFs.

‘That’s my humble opinion as a fund manager who invests in companies, not in the overall market. But people that are looking at Japan from an asset allocation point of view may have a different opinion, I just don’t think it’s the right way to go.’

Central bank interference

Glod said there are many changes happening in the Japanese markets, such as Abenomics and changes to employment, which he believes will bode well for quality companies.

‘The problem at the moment is that the central bank buying ETFs is majorly distorting the market, and I don’t really know where it’s going to end.

‘The biggest buyer of ETFs since the beginning of the year has been the central bank in Japan. Institutional investors and pension funds have been more on the sidelines and that’s not good for fundamental investing.’

Glod said that ETFs don’t influence his stock picking decisions but said the trend is ‘disturbing’ him.

‘It’s not based on fundamental investing, analysts at Nomura estimate that since July 2016, the cumulative boost of central bank purchases to the Nikkei 225 has been about 1400 points (-8%), and that’s difficult for an active investor to compete with.

‘Over the long term, the distortions created by central bank buying might lead to investment opportunities for fundamental investors like ourselves, nevertheless, I don’t think this is a healthy move.’

Over the three years to the end of March 2017, the BL Equities Japan fund returned 50.98% in Japanese yen terms. This compares with a 33.67% rise by its Citywire-assigned benchmark the Topix TR, over the same time period.

Please click here to access the entire article.

Steve Glod, Equity Fund Manager

Steve joined Banque de Luxembourg's Financial Analysis and Asset Management department in 2001. Since 2011, he has been in charge of Japanese equity investments for the Bank's funds range. Between 2005 and 2010, he was co-manager of US equity investments for the Bank's funds range. Steve has a degree in Mechanical Engineering with a specialisation in business management, and a doctorate in technical sciences from the Swiss Federal Institute of Technology in Zurich (ETH Zurich). He obtained the CEFA (Certified EFFAS Financial Analyst) diploma in 2002.

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