GLG Japan CoreAlpha update Q2 2014

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GLG Japan CoreAlpha update Q2 2014 For institutional/professional/qualified investor and intermediary use only. Not for public distribution.

WARREN SHIELS: Good morning everyone, my name’s Warren Shiels. I’m a director within the UK Retail team at Man GLG and I’d like to welcome you to today’s Japan CoreAlpha Quarterly Conference Call. I’m joined for the call today by Steve Harker who’s one of the fund managers on the strategy. Steve will provide an overview of the second quarter for 2014 covering both the market and also the strategy. This will be done by covering the slides, which you will hopefully have access to. As always you’ll have the ability to ask questions and type those on the sidebar. I will then pose those to Steve at the end of his update. So without further ado I’d like to hand over to Steve. STEVE HARKER: Good morning everybody and thank you very much for taking the time and trouble to listen in this morning. I’d like to start on page 3 and once again give you an advertisement for our UK fund website, JapanCoreAlpha.com. If you go to that URL and click on the yellow banner and accept, you’ll be able to see all the information on the UK fund. As of this morning, we have updated the website to include the Q2 quarterly report, which I’m going to talk about a little bit in a moment, but if you want greater detail please go to the UK website. Before I talk about Q2, I’d just like to make a few comments about the 12 months to the end of June which has been a really excellent period for us. We’re really very pleased with the end result. It’s been a very difficult environment. If you look at that 12 month period, Small Caps within the market are up something like 18%, Mid Caps are up 14% and Top Caps are only up about 8%, so it’s been a very size-dominated environment, and for some periods the Growth stocks have been winning as well. So it’s really been a very tough time against TOPIX. On a growth basis, we’re about 3% ahead over 12 months, and against our shadow benchmark the Large Cap Value Index of Russell Nomura we’re something like 6% ahead of that Index over a 12 month period, so we’re really really pleased with what we’ve achieved. It really kicked in from the 1st of November last year and really continued through the first quarter. The second quarter hasn’t been any great shakes; it’s been pretty well as we’d have expected given the market moves. So we had a really wonderful purple patch from November through to early April. If I could turn to page 4 now, I’d just like to look at the ‘Lego block’ breakdown of the Russell Nomura Index, which as you probably know correlates quite well with TOPIX. In the centre at the top of the page you can see that the TOPIX return for Q2 was 5.1% positive, a nice return. The market suddenly kicked into another gear and continued to improve, and it’s currently pretty well at the high that it’s been in the Abe period, so it’s sort of had a period of digestion following last year’s big moves and more recently we’ve seen a strong recovery. In the market, again, we saw Small Caps winning, but Large Value beat Large Growth, so we had the wind behind us a little bit, and on a growth basis we’re very slightly ahead of the Index, which is probably what you’d expect for the period. Just one final comment; sterling has been quite strong generally, it’s been strong against the yen, and obviously the returns in sterling are lower than this, but more generally I think the yen hasn’t really been weak and over the second quarter was actually ahead against the dollar for the three months. If we can now turn to page 5 and just very very quickly look at the scoreboard for the year-to-date, and you can see TOPIX is still down, 1.9% over the first six months of the year, and it’s very definitely concentrated in Large Value; Large Value, which is our shadow benchmark, is down 3.1%. So we’ve had a headwind this year as we had from September onwards towards the back end of last year. So the market hasn’t been helpful for us. Small Caps are up year-to-date and Large Value is underperforming Large Growth. So these are not dramatic numbers, but they are causing us a bit of grief in terms of headwind. Despite that we’re something close on 1% ahead of the index in this period, which is part of the story of our really happy mood relative when we’re talking about the last 12 months. If you turn now to page 6, I’m not going to talk for much longer, because hopefully we’re going to get some questions and we can expand on a few ideas and thoughts in the Q&A, but I do want to mention again the currency. We are not wanting to make a forecast of the currency; we just want to express a warning that the yen has been depreciating for 19 years. It peaked in April of 1995. It had a very significant fall in the early phase of the Abenomics cycle and over the last year has not really moved that much. It’s certainly depreciated against sterling, but it has stabilised against its trade weighted real basket, as you can see, and over the last few months the yen has actually been strengthening. The levels it plumbed in the early part of this year were very similar to where we were in 1982, which is a very long time ago, and I want to reemphasise this, we’re not making a forecast about the yen, but the yen has an effect on the real economy with a very long lag of two, three, four, five years, and this depreciation that we had last year will start to impact the market and the economy from now on. The impact from now on should be quite positive and we think that that depreciation we’ve seen is probably enough to satisfy the corporate sector and the Government. So we’re not in the camp that expects a collapse of the yen and in many ways we would not be surprised if the yen were to appreciate, but again this is not a forecast and I don’t want to have people accusing us of forecasting. We just want to issue a polite warning that the yen can go up as well as go down. If we could just finish off on page 7 with a review of the performance of the UK fund. This is obviously after taking into account 1½% fees, because we have to show the retail class, and this quarter too, we’re in the middle of the pack, 27 out of 50. On a gross basis we’re ahead of the index. Over one year we’re 1.7. I mean basically we’re about 3% plus ahead of TOPIX over 12 months and we’re really really pleased, we normally do well when we’ve got the wind behind us and we’ve actually managed to do well relative to our shadow benchmark with the wind in our face, and that’s quite unusual and it bodes really well for the future. With that I think I’d like to stop, hand over to Warren, and we can take any questions you have. Thank you.

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WARREN SHIELS: Thanks Steve for the update. The first question Steve that we have is the bond yield has fallen close to record lows, why has that been the case and what are the implications for style investing? STEVE HARKER: Okay. If we could turn to the bond yield page and take a look at what’s happened. This goes back to 1982. The falling Japanese bond yield is obviously part of a global pattern and it’s a pattern that’s been established since 1981, so we’ve had 33 years of falling bond yields, and this is the Japan ten year JGB, it’s fallen from over 8% to 0.5%, just over 0.5% as of today. I think it was roughly 8% when the equity market started to crash in late ’89/early 1990 and it’s gone all the way down from 8% to 0.5% and it’s typically gone down the most in periods of global strife. In 1998 the LTCM crisis, in 2003 the Iraq war and, you know, the SARS epidemic and all the other stuff that was going on at that time, and also we had internally in Japan the final solution to the banking problem. Then following that real low in 2003 we had a backing up of yields and they went up to about 2% and this is the period of Koizumi's QE when the market was hot and when Small Caps were winning. From 2006 onwards the bond yield has relentlessly fallen from 2 to 0.5% and Abenomics, which we’ve been enjoying for the last what 18 months, 20 months, has had no effect and the bond yield continues to go down, which is intriguing. I mean the absolute low of the bond yield was in early April last year when it actually got down to about 0.3% intraday, I think, and we’re currently at about 0.5%. This is not good news for us, because we’re contrarians we’re obviously betting on things that have been underperforming for a long time and anything that benefits from rising interest rates is in our portfolio. So we’ve got a very significant tilt towards bond yields rising and if bond yields rise we should win and this is why in the last few weeks and months and quarters we’ve been winning despite the fact that we’ve had the equity market headwind against us. The reassuring thing is that the bond yield can’t go much lower and in the process of going lower the return to bonds is effectively zero. So there’s not much more damage I think can be done, but we’re positioned for this line going up and so far it hasn’t gone up. It’s a function of basically public policy I think and interest rates being driven down to zero at the short end and an excess of savings in certain economies and demographics. We don’t really want to make any comment about the future, because we don’t really know what’s going to happen, but we think that the likelihood is that yen interest rates will go up and that will be to our benefit. WARREN SHIELS: Okay, thanks Steve, another question we have is you currently have a weighting of 3% in the automobile sector and what’s the background or thesis behind that? STEVE HARKER: Yes, we’ve managed over the last 25 years to deliver exceptional returns in excess of TOPIX, and from 1995 onwards we’ve had virtually no exposure to the autos. We’ve been very underweight, with a couple of exceptions. One in 2006 when we started CoreAlpha and again post Lehman we had a bit of weighting there. We had an index position in Toyota until last year, and Toyota was a fantastic performer in the first year of Abenomics and it went up so much that we decided to get out completely. So we sold out of Toyota in August of last year and that meant we had nothing in the transport equipment sector. It’s the second biggest sector in the market after electrical appliances, and we had nothing, so we had 11½% short position. Toyota’s been underperforming, Honda has been a terrible performer, Nissan has been quite a bad performer as well, and in January we decided to start a position in Honda, which we’ve been gradually building up on weakness since then. So we’ve got our biggest weighting in Honda, about 2.2%, and also in the month of June we took a 1% stake in Toyota, and this is really just a defensive position. The sector’s performed quite badly and we felt that having a full complete underweighting in the sector was just a bit too leggy. So we’ve got 3%, we’re minus 8% in the sector. So it’s still our biggest sector underweight and we’re going to review that as we go along and see whether we want to increase it or just stay where we are. WARREN SHIELS: Okay, thanks Steve. Just another question just in regards to net foreign investment in Japanese equities, what’s the themes or what have we seen or have you seen in this area for 2014? STEVE HARKER: If we turn to the net foreign investment slide, just to show you what happened last year was quite exceptional. Foreigners have been increasing their weighting in Japanese equity since 1991, almost without a change. You should see a bar chart showing the net foreign investment each year over the last few years. You can see how dramatic was the inflow of money last year, ¥15trn came into equities from foreigners, which swamped any previous inflow, including the TMT bubble in 1999 and the Koizumi red-hot Small Cap Growth market in the middle 2000’s up to 2005, you can see there were three really strong years. When foreigners have bought historically the market has gone up and the two big years for the market were 1999 when it was 58% and last year when it was up 51%, and those were two of the big years for foreign inflows. So foreigners were driving the market higher. When foreigners have been selling the market has had its worst years and you can see in 1990, 2000 and 2008, the Lehman crash year, the market fell well into double digits, two really big falls and one fairly sizeable one, and that coincided with foreigners selling and helping to drive the index down. And nothing broke down. With the Abenomics period we’ve not seen any breakdown in the relationship. When foreigners buy the market goes up. This year is so far quite uninteresting. Foreigners have basically stopped buying for the moment. They took a few profits in January and February. The market volume as a whole has tapered off quite dramatically and there really isn’t a lot going on, and that fits with a global pattern. The stock market trading volume has fallen everywhere and Japan is seeing the same trend and there’s not much going on. It would appear that domestics were more responsible for the market move in recent weeks rather than foreigners; there has been no great foreign net participation. So again we don’t really want to make forecasts of what foreigners are going to do, because we don’t know what they’re going to do, but there has been on breakdown or change in the historical relationship. Foreigners dominate trading in the market, they own 30% of all equities in Japan, 2

and what they do matters. WARREN SHIELS: Okay, we’ve probably got time for one more question Steve, we’ve got a question here. At what stage of the economic cycle do you think the Japanese economy is in now? STEVE HARKER: We think the labour market is probably giving you the best signals. People should not expect dramatic growth from Japan and the labour market is very tight and typically the labour market is tight and then it becomes slack. It was tight in 1973, it was tight in 1989, it was tight in 2006, and it’s just as tight now with the shortage of labour, and that’s partly because a lot of people have been retiring. Companies are finding it much more difficult to recruit good quality people and the growth of the Japanese economy will be restricted by the supply of labour, and it’s not the only country to suffer this problem. Korea is in the same boat, and Korea is suffering also because they work long hours and there’s legislation to reduce the working hours in Korea, which happened in Japan 20 years ago and caused a step-down in Japan’s growth. It’s true in Germany, it’s true in Italy, it’s true in lots of other countries. The demographics are restricting the potential of developed economies from growing. So we’ve never been pushing the dynamic growth of Japan. It’s not the reason why you should be investing in Japan. You should be investing in Japan in our opinion because it’s a very lowly valued market. It’s been out of favour for a very long time. Some of the corporates are really top class and it’s a cohesive society and we think that there are a lot of headwinds and problems in the world, which Japan isn’t likely to face this time. The problems of credit and debt deflation are a thing of the past from Japan’s perspective, I think, and we think that the outlook for Japan is relatively good, but we really want to emphasise it certainly isn’t exciting. And the opportunities in the market, if there are any, are to do with valuation, not to do with growth. Having said that, if you look at dividends per share, dividends are growing more quickly than at any time in the last 30 years, and this is thanks to the 30% depreciation of the yen against the dollar in 2013/14. So the currency depreciation is having a dramatic effect on dividend payouts and dividend growth. The market is on 15x earnings, it’s on 1.2x book, and that 1.2x book is less than half of the US market. It’s less than half of the US market and corporates are making profit and the return on equity is going up, and this is not a growth story, it’s a valuation story. WARREN SHIELS: Okay, that’s great. Thanks Steve. I’d just like to take the opportunity to thank everyone that has forwarded a question through. As always the conference call will have a replay and transcript, and that’ll be posted to the Japan CoreAlpha website that Steve mentioned earlier on in the call within the next week or so. I would just again reiterate if you don’t use the website it does have a wealth of information on the Japanese markets and also the strategy which I’m sure you’ll find useful. Finally, we’d like to thank you all for your continued support of the strategy and if you’d like further information on the Fund please get in contact with your usual Man GLG sales contact, thank you very much. STEVE HARKER: Thank you. Important information This material is provided for information purposes only. Potential investors should note that investments in financial securities can involve significant risks, including the loss of the principal amount invested, and the value of an investment may go down as well as up. Performance may be affected by economic and market conditions, including currency fluctuations.There is no guarantee of trading performance and past or projected performance is not a reliable indicator of future performance. Awards and/or ratings are referred to for information purposes only and should not be construed as an endorsement of Man, its affiliates or its products. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are determined. FE Alpha Manager Ratings do not constitute investment advice offered by FE and should not be used as the sole basis for making any investment decision. © 2014. All rights reserved Communicated by GLG Partners LP, One Curzon Street, London W1J 5HB. Authorised and regulated in the UK by the Financial Conduct Authority. 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