Fortune Rota Volvitur: Part 5

(Jan 2019) Mark's thoughts on the current state of the Japanese market as well as some retrospective reflections.

Preface

This first quarter of 2019 marks the 20th anniversary of Arcus[1] since we started to manage strategies in the first quarter of 1999.

In the first half of this paper I summarise current valuations and put them into an historical context.  After almost a decade of value underperforming growth, the spread between expensive and cheap stocks is now as wide as we have seen, at least since the TMT[2] bubble of 1999, suggesting high potential future returns for our value strategy.

In the latter half of this paper I look back over 20 years of managing Japanese equities at Arcus. Arcus Strategies[3] returns have been strongly positive in absolute and relative terms over the two decades, in a market that has rarely provided a following wind. Yet the difficult times stand out much more vividly in my memory. I consider the causes of those problems, how we overcame them and some of the lessons learned.

My overall conclusion is that we are currently at the third major entry point in 20 years for our Japan value strategy, the previous ones being 1999 and 2008. Long-term returns have been very good, but by far the best returns have been available at entry points created by dips in the returns to value accompanied by widening of valuation spreads, which is what we have now.

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[1] Arcus Investment Limited (“AIL”), Arcus Investment Asia Limited (“AIAL”) and Arcus Research Limited, Japan Branch (“ARL”) are hereafter collectively referred to as “Arcus” or the “Arcus Group”.

[2] TMT = technology, media and telecom.

[3] Arcus Japan Fund (“AJF”), Arcus Japan Long/Short Fund (“AJLSF”), Arcus Zensen Fund (“Zensen”), Arcus Genseki Fund (“Genseki”) and Arcus Japan Value Fund (“AJVF”) are collectively referred to as the “Arcus Strategies”.