Investors hope to benefit from efforts to weaken yen
Post-war highs and lows in financial markets have been remarkably common since the collapse of Lehman Brothers in September 2008.
Most notably, American and British government bond yields hit almost inexplicable post-war lows, despite high inflation and record post-war indebtedness in many developed countries.
But even by the bizarre standards of recent post-war highs, the behaviour of the yen takes some beating. Last week, it hit a post-war high against the dollar despite a sluggish outlook for Japan’s economy relative to America and the earthquake and tsunami in March. Last Thursday, the Bank of Japan (BoJ) announced it would buy ¥5 trillion (£41 billion) of Japanese government bonds in an effort to weaken the currency.
The fate of the yen will have a substantial effect on Britain’s two top-performing Japanese equity invest- ment strategies of the past five years, Neptune Japan Opportunities and GLG Japan CoreAlpha. The funds are the only two to have beaten their benchmark stockmarket indices and the return that investors would have received in a cash account. (article continues below)
Two-and-a-half years ago, after a massive rise in the yen, Chris Taylor, the manager of the Neptune strategy, said he would hedge out the effect of the yen-sterling exchange rate on the performance of his investments in sterling. On a global level, Taylor maintained that Japan still had a number of world-class companies, but he was afraid a dip in the currency would hurt investors’ returns.
Subsequently, GLG released a similarly hedged version of its CoreAlpha strategy, the Japan CoreAlpha Equity fund, and kept the underlying strategy in place. GLG continued to look for companies whose shares were worth less than their tangible assets and should be highly likely to rise as a consequence. Recently, this price-to-book ratio was just 0.7 for the portfolio, meaning the firms GLG held were trading at a 30% discount to their “hard assets”.
Hedged investors, however, have been disappointed over the past two-and-a-half years. The pattern proved similar to the first part of the 1990s, when the yen soared following a financial crisis, but suffered a spike of less than 12 months after the Kobe earthquake in January 1995. This proved to be the top of the market. By the end of August 1998, the currency had given up all the gains made over the decade.
Investors in Neptune Japan Opportunities and GLG Japan CoreAlpha Equity will hope the pattern is repeated. The BoJ’s previous interventions have proved ineffectual, but investors should eventually stop having to repatriate resources to cope with the after-effects of the earthquake. If that happens, hedged investors could experience a welcome uplift in returns - that is, if the eurozone crisis does not push stockmarkets lower.