(Bloomberg) — A top-performing Japanese fund is shifting its attention to railway operators from automakers on expectations companies that rely on domestic revenue will fare better should the yen rebound.
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Carmakers, which have been among the Topix’s best sectors this year, may start to face headwinds if a stronger currency reduces the value of their overseas revenue, according to the Eurizon Fund Sustainable Japan Equity fund, which is outperforming 94% of its peers so far this year. At the same time, gains in the yen would lower energy costs for railway operators, the fund said.
Eurizon‘s view on the currency suggests a possible adjustment to its strategy. A majority of the fund’s top 10 holdings were exporters including Toyota Motor Corp., Sony Group Corp. and Takeda Pharmaceutical Co. as of the end of September. Railway companies were not on that list.
“We are entering a major regime change that might last for years,” in terms of the yen, said Joel Le Saux, who manages the €1.08 billion ($1.2 billion) Luxembourg-based fund from Milan.
Eurizon’s portfolio has returned at least 34% so far this year, exceeding a 31% gain in the Topix Net Total Return Euro Hedged Index.
During that period, the Topix subindex that tracks automakers soared 26% in euro terms with help from the yen’s depreciation, compared with a gain of about 1% in the gauge that includes East Japan Railway Co. and Tobu Railway Co.
Le Saux also sees potential in railway stocks because inflation is likely to stay above 2%, keeping the country from slipping back into deflation. Higher interest rates will have less of an impact on railway operators, as they have large fixed assets and infrastructure, he said. More than two-thirds of economists by Bloomberg see the Bank of Japan scrapping its negative interest rate policy by April, with half of the 52 respondents saying it would happen that month.
In addition to its objective to outperform Japanese equity markets, the Eurizon Fund focuses on environmental factors. The fund tries to filter out companies that are highly exposed to commodities, while selecting stocks that are cash flow rich and undervalued. To help improve governance, it focuses on engaging with companies with excess cash, recommending that they buy back up to about 2-3% of shares over the next five years.
(Corrects benchmark reference in fifth paragraph)
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