Small caps outperform large caps in March


Fund Commentary
21 Apr 2017


Japanese small caps rose continuously in March whilst the overall market traded sideways due mainly to the weaker dollar against the Japanese yen.

Although the US Fed raised rates by 25bps the dollar weakened and investors stayed away from the market for fear of a global market plunge. Investors are exhibiting increased uncertainty regarding the Trump administration which may not be able to execute as many new policies as promised over the last couple of months. Specifically, there are concerns about Trump’s $1 trillion budget plan for public spending and tax cuts. In Japan, domestic companies performed relatively well in March whilst exporters were weak due to the strong yen. However, domestic companies slightly deteriorated toward the end of the month.

During the month, Seria (2782), Outsourcing (2427), Relo Group (8876), and Advantest (6857) were the top contributors to the portfolio return. On the other hand, Nissha Printing (7915), Tokyo Century (8439), Komeri (8218), and TDK (6762) were the main detractors.

Small caps had a surprisingly strong run in March whilst major large caps remained quiet. The dollar weakened against the Yen in March which may cap the market’s upside in April and May in both the large and small cap space. Investors’ increased cautiousness about earnings in the new fiscal year, which has just started in April, is mainly due to the uncertain global economy. Current consensus EPS growth projections for the new fiscal year are about +10% to +15%yoy based on the dollar/yen at around 115yen/dollar which represents a slightly weaker Yen when compared to the current level around 111. The Trump administration remains a headache for investors who have a skeptical view on the delivery of $1 trillion worth of public spending and tax cuts. Having said that, the Investment Adviser believes there are companies that can maintain a solid level of earnings growth this fiscal year regardless of the macro environment. The Investment Adviser will continue to seek out good companies with potential for high growth in Japan.

One such example is Vector (6058) which provides marketing support for companies whose recurring profits have reached $2m – $3m by creating 1 minute trailer ad movies. These companies typically used to use TV advertising costing in the range $0.5m – $1m which is now unsustainable. Vector can provide targeted online marketing in the form of short movie ads for in the region of $50k – $200k, which is a fast growing area. Vector often makes private investments in companies that use Vector’s ad service, giving them the opportunity of capital gains on their equity investment.


The views and statements contained herein are those of Rheos Capital Works Inc in their capacity as Investment Adviser to the Fund as of 12/04/17 and are based on internal research and modelling.