War Pushes Japan Equity Fund Into Cash, Eyes Re-Entry in Banks

A top-performing Japan equity fund has cut exposure to cyclical stocks and increased cash levels amid heightened uncertainty surrounding the Iran war, and is now waiting for the moment to get back into bank and industrial shares.

Liontrust Japan Equity Fund, which is usually fully invested in Japanese equities, has increased its cash position to about 6% after the breakout of hostilities in February, said Thomas Smith, a London-based portfolio manager who oversees the fund of about ¥15.84 billion .

“The range of possibilities is far broader and so typically taking that uncertainty into account, we have reduced the cyclicality of the portfolio,” Smith said in an interview. “We are holding more cash than we had previously, but we’ve also added to mostly just the classic defensive sectors.”

The fund’s stance illustrates how some foreign investors want to boost exposure once broader risks subside. Foreign investors have helped Japan’s benchmark index recoup its losses since the outbreak of hostilities, with net buying in the second quarter well on the way to reversing outflows seen in March.

Liontrust’s currency-hedged fund has returned about 14% so far this year, outperforming 98% of its peers, by overweighting industrial sector and holding shares of major lenders. Some of the large cap industrial names it holds, such as Mitsubishi Heavy Industries Ltd. and Hitachi Ltd., have been outperforming the Topix for the past 12 months, rising more than 50%.

While underweighting financials overall, the fund is overweight banks even after reducing its exposure slightly since the start of the Iran war. If the situation improves, “banks are somewhere that we’d be adding back to,” Smith said.

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