The best Spanish mutual fund in 2017 has been Japan Deep Value Fund, according to Funds People, with a 37.4% return, and a 55% since inception the year before. It is managed by Marc Garrigasait, who runs two more investment vehicles: Koala Capital SICAV, his “ideas laboratory”; and Panda Agriculture & Water Fund FI, which invests in agricultural and water-related companies.
Japan Deep Value Fund was launched in August 2016, as a result of the huge amount of good Japanese investment ideas generated in the last years in Koala Capital. It follows a strict deep value investing strategy, participating in small and microcaps with extraordinarily low valuation multiples, mainly the EV to FCF one. The main characteristic of the investment philosophy, besides the deep value strategy, is contrarian and long-term buy and hold approach to obtain high returns in the next years.
According to the fund manager, “Japan is going to be the paradise for value investors in the next 5 or 10 years”. The reason for this is that, currently, Japan does not have a good investment environment (lots of years with negative returns, the economy is not growing, corporate culture of keiretsus is bad, etc.). Moreover, Japanese small and microcaps are not followed by brokers and it seems like nobody wants to invest in this region. Thus, valuations are extremely low, with irrational multiples. As an example, Maruzen had a lower enterprise value than the generated FCF and TFC had a negative enterprise value, though it generated a positive free cash flow.
The main risk comes from the lack of information. Although they have translated annual reports to English from Japanese, they find it difficult to obtain sector information such as market shares due to the lack of Japanese brokers and the absence of interest in this market by the rest of the world investment industry. Nevertheless, the safety margin is so high that the risk is compensated. Another uncertainty regarding these companies is when are they going to achieve the estimated intrinsic valuations, that is: what are going to be the catalysts that drive expected returns. According to Garigasait, there is one important issue, which is the generational change in boards of directors. Current managers are old and too conservative, and their succession in the following years could be an important driver. Moreover, some investors are focusing in Japan due to these low valuations, such as Cobas, which, eventually, is going to drive valuations up.
Japan is full of value traps, so the stock picking process is essential for Japan Deep Value Fund. Originally, they chose the best 38 stocks, half of them with less than $300 million market cap. The P/BV was around 1 and the FCF yield of the portfolio was 30%. In addition, 71% of market capitalization is net debt, so the downside risk is very low. The average return on capital is 18% and growing, as well as the turnover of the companies, which has been increasing in the last years. The portfolio turnover has been 0 in the first year, and then they have included 4 stocks in the last months due to the growth of assets under management, consolidating the buy and hold strategy.
The life of this fund is very short, so we cannot say too much about the performance, which can only be tested in the long run. Yet, the strategy is interesting, as it is the investment philosophy. Maybe Japan is the next bull market, so holding some deep value fund like this one in the portfolio might be a good investment decision.