Performance update - Q3 2016

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For investment professionals only. Not for public distribution.

Man GLG Japan CoreAlpha Fund update

Performance update - Q3 2016 RICHARD PHILLIPS:

Good morning everyone. My name is Richard Phillips and I’d like to welcome you all to

the quarterly Man GLG Japan CoreAlpha Fund conference call with my colleague Steve Harker. As usual Steve is going to talk for around 15 minutes giving you an overview of what he’s done in the fund over the last three months and then we’ll throw it open to questions. Please just click on the link that you see on the web page, submit the questions and I will go through them at the end. So without any further ado I shall hand straight over to Steve.

STEVE HARKER:

Good morning everybody. I’ve got nine slides to go through, which is about normal, and it

should take 12 to 15 minutes. If we could start with page 3. I’ll just start with a few macro and political comments. Page 3 shows the performance of the Japanese stock market - TOPIX against the UK All Share Index in common currency, going back over the life of the Japan CoreAlpha strategy. Basically Japan has underperformed over that whole period - but that was largely due to poor performance in 2006/07. What I want to say is two things. First of all the two periods when Japan outperformed, one was in 2008, and more recently for the last 30 months Japan has been beating the All Share Index. Both of those periods have been periods of falling oil prices and commodity prices generally. I think it’s really important that we realise that the key driver of TOPIX against the UK and the rest of the world is probably macroeconomics rather than macro-politics. As you know, we’re deeply sceptical about the whole Abenomics project, and it’s really intriguing that the only time that Japan has been winning is when the oil price has been falling. Turning to page 4. This is over the same period since the launch of the Japan CoreAlpha strategy in 2006. It shows the performance of TOPIX in sterling terms, adding back dividends. The market has essentially been going up since the early part of 2009 post-Lehman. As you may remember, Japan had a very strong performance in the Lehman shock and then lost quite a lot of it, but since Abe got into power, the market has performed really well. It’s up about 100% in sterling terms, which in recent weeks is partly a function of sterling weakness than anything else. But I think the point I’m trying to make is that for a UK-based investor, Japan has not been a bad place to have been over the last seven years. We’re really pleased with the returns that it’s been delivering - this year has been a really positive surprise since the end of June. Turning now to page 5 - just a few slides looking at performance and strategy and what we’re doing. Page 5 shows the usual distribution of the portfolio, and you’ll not be surprised to see that the vast bulk of the assets are still in Top Cap Value and Mid Cap Value, which is where we’ve always been. We are Large Cap Value managers, and I think it’s always worth repeating that point.

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Turning to page 6, you can see that this slide shows the relative performance of Large Cap Value against the Russell Nomura Total market Index going back since the launch of the strategy. We had two-and-a-half years or three years of good returns from Large Cap Value, and the style problems have been kicking in since then, from April 2009. In particular the period from October 2015 to July 6th of this year has seen a really significant lurch down in the performance of Large Value, followed by a recovery over the last three months. Obviously in that sort of environment we can’t possibly win, but what’s intriguing is that over most periods, apart from one year, we’ve managed to beat TOPIX, which is really quite extraordinary and comforting. And as soon as this line is turned upwards we’ve kicked in and had terrific performance. Page 7, shows the performance. We showed this last quarter - the quarterly excess returns of the strategy on a gross basis going back to 2006 - and there are a number of points to make. Q3, we were about 3% or so ahead of Large Value, which outperformed TOPIX, so we had a really terrific performance against TOPIX, the best quarter we’ve had since Q2 2009. That quarterly performance against Large Value was at the top end of the range of what we’ve seen in quarters in the last seven years - but looking at the last two or three years, the negative quarterly returns have been quite small. When we have a bad quarter it’s not been as bad as it was in the earlier period when we clearly had much bigger bets at the sector level. Now, just to look at the Q3 indices to see what was going on - on page 8. We managed to achieve a return of about 14% in yen terms, which was helped enormously by the weakness of the currency as well. On top of that Top Cap Value and Mid Cap Value were the best two segments. Top Caps beat Mid and Small, and Total Value beat Total Growth, which is the first time that’s happened for five quarters, and reverses to some extent, the negatives in the first half of the year. And then looking on page 9 you can look at the year-to-date and see that Large Cap Value, (Top Cap plus Mid Cap) is still the worst part of the market, and that explains our underperformance against TOPIX so far this year. We’re outperforming against Large Value, and we’re pleased with the return that we’ve achieved relative to our style benchmark, but it’s been a difficult year for Large Cap Value. We can’t get away from that. We just stick to our knitting and keep plugging away and assume that things will turn for the better. Page 10: this slide shows where we were from a top 10 holdings perspective at the end of 2015, and where we are now at the end of September (on the left hand side). We have made two significant additions to the portfolio. Toyota we had nothing in at the start of the year - we’ve now got 5% and Mitsubishi UFJ - we had a smallish holding in and we’ve beefed that up to become our biggest holding. Toyota and Mitsubishi UFJ are number two and number one respectively in TOPIX, so these are the two biggest companies in Japan, and we’ve got beefy holdings in them for the first time in some years. The portfolio is largely unchanged. We’ve raised our weighting in financials, having cut it in June/July last year. So we took quite a big slice out of financials, life insurers and Mitsubishi in the summer of 2015, and we put it back in in Q1 and we’ve stayed there. The financials bottomed in the second week in February and have been basically tracking the reference index or slightly better since then. The portfolio as I said is overweight cyclicals and financials, and underweight defensives and pretty neutral in tech - if slightly underweight, maybe.

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And then finally on page 11, I think I always leave this one to the last. It’s I think, the real justification for our continuing - to see this line normalise. The line shows the valuation relative of Large Cap Value against the Russell Nomura Total market going back to the inception of the Russell Nomura indices in 1980. Up to 2010/2011 it ranged between 80 and 100, i.e. Value stocks were somewhere around 10% cheaper than the market. Since then it’s lurched down to a point in late June/early July when the valuation of Large Value was something like at a 35% discount to the market, which is unprecedented on a 37-year view and I suspect it’s unprecedented on a 80-year view - although I can’t prove it. There has been some improvement over the last three months, as you can see - which we’ve benefited from. Our basic view is that we don’t know what’s going to happen but our hope and expectation is that this line will normalise over time and will head up back into the 90% range. If we do that, Large Cap Value is going to outperform by a very large margin indeed, and hopefully the Man GLG Japan CoreAlpha Fund would benefit in the same way. So at that point I’ll hand over to Richard for Q&A.

RICHARD PHILLIPS:

Thank you. The first couple of questions are more macro. With the recent news from the

Bank of Japan do you think this is the beginning of the end for QE?

STEVE HARKER:

I think - possibly. It’s hard to judge. We are dealing with I think, a monetary revolution, and

revolutionaries tend to be set on a course until they’re blown off it. It’s really hard to judge but I sincerely hope so, because this isn’t doing anybody any good. It’s leading to misallocation of resources, and I think in the long term will backfire and undermine Japan rather than promote Japan’s economic wellbeing.

RICHARD PHILLIPS:

What effect will the BOJ switching their buying from the 400 to the TOPIX have on your

fund?

STEVE HARKER:

Hopefully a good one. I mean the BOJ has been buying - and we also need to take into

account the GPIF, the big state pension fund which has been heavily involved in the Abenomics project by investing in certain sectors of the market. The GPIF has been buying equities and it’s been focusing on the 400 and on Smaller Cap Value, neither of which would be to our particular benefit. The BOJ has been focusing on the Nikkei 225 rather than TOPIX in ETF form and the switch from the Nikkei 225 to TOPIX would less unhelpful shall we say, than it has been. Investing in the Nikkei (the Nikkei 225 is a crazy index) has a low weighting in Large Cap stocks such as Toyota and Mitsubishi UFJ, and some bigger weightings in relatively peripheral stocks and this focus on the Nikkei 225 has really seriously skewed the index. My big wish is that all of this intervention stops, but I think we may have some time to wait before that happens.

RICHARD PHILLIPS: What do you think drove the outperformance of Value in last quarter? STEVE HARKER:

I think the previous underperformance would be the answer to that. I think these things are

always very difficult to understand while they’re happening, and it makes a lot more sense in retrospect. Basically what’s happened is that low volatility bond substitutes have been winning for the last four or five years - everywhere and no less so in Japan. In the process that is - essentially defensives are winning. We had a lot of defensives at the start of that process and gradually have sold them all. What caused it to happen now? It could be something to do 3/5

with the global cycle - the steel stocks and the commodity stocks. (If you look at Glencore and Anglo American in the UK, they’ve gone up enormously over the last year and the steel stocks likewise). It could be that what we’re seeing is an economic recovery taking place at the global level, which Japan is benefiting from. In which case there should be more of this to come. There have been a number of big turning points over the last 30 years within the Japanese market, reversals into and out of Value; reversals, into and out of size, and they all look and feel the same. When it happens you can’t work out why, and then afterwards you can understand. I think the reversal that took place after 7th July this year is really profoundly important, and a big one. I don’t want to make any more statement about that, but I think it’s a really dramatic event, and we shall see that over the course of the next few years.

RICHARD PHILLIPS:

OK, Steve, the next one is about the yen. I can answer the first part, which is about

currency risk within the Fund - you don’t take any. We have hedge share classes available on our Dublin fund. The UK OEIC gives you exposure to the yen. But following on from that, are you positioning for a devaluation in the Yen?

STEVE HARKER:

We don’t invest on macro or thematic issues. We always invest in a contrarian way -

investing in low price to book stocks. Our big tilt is towards low price to book - always, and anti-momentum, i.e. mean reversion of price. Our portfolio is overweight yen sensitives, i.e. it should benefit from a falling yen - and it has been for the last year. We don’t really want to make a forecast about the yen exchange rate at these levels, but we’re extremely pleased with the forecasts and warnings that we were putting out in the summer and autumn and even into January of this year because it seemed to me at the time that the yen was preposterously undervalued. I don’t really know where it is going in the future, where we are in the cycle, so I’m reluctant to make any forecasts, however, it is important to recognise that the way we pick stocks is independent of our economic views so nothing will be changed at the portfolio level.

RICHARD PHILLIPS:

The next question is on China. Does a potentially more stable outlook for China have a

significant impact on Japanese companies?

STEVE HARKER:

Undoubtedly yes. Asia represents a very substantial chunk of Japan’s exports and Japan’s

historical overseas investment in productive assets. 30 years ago Japan was heavily dependent on America and Europe, and now it’s heavily dependent on Asia, and China is obviously central to that, being such a big place. If China is more stable, then Japan will benefit from that stability for sure.

RICHARD PHILLIPS:

Well that is the end of the questions for now, so thank everybody for dialling in and for

your questions. We’ll do this conference again next year, and we look forward to speaking to you again in January. Thank you very much for your time.

STEVE HARKER:

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Thank you very much.

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