We believe that attractively-valued stocks with positive price trends and earnings momentum will outperform the market. This reflects our notion that financial markets are inefficient, which in turn causes segments of the market to sustainably outperform or underperform in a way that can be exploited. Sustainable outperformance may be achieved by investing in stocks with attractive style characteristics. Value-based strategies have been successful in the Japanese equity market.
Many of the inefficiencies that we aim to exploit are persistent because they are driven by behavioral biases that can remain in place for prolonged periods. By following a disciplined investment approach focused on maintaining style purity, we believe investors can exploit the persistent inefficiencies inherent in the Japanese equity market.
A highly disciplined approach to stock selection, portfolio construction and implementation is a hallmark of our investment process.
Following our investment philosophy, the Japan Strategic Value strategy aims to invest in the most attractively-valued stocks, while ensuring that each company selected is fundamentally sound. Using our proprietary TMV (Trends, Momentum, Value) model, we employ a consistent approach to examine the value model, and momentum characteristics of over 1,700 stocks in the Japanese equity market. For this strategy, we focus on value characteristics, such as price-to-earnings and price-to-book ratios. After narrowing the universe into the most attractively-valued stocks, we research the names further by looking at news flow (earnings revisions and price momentum), as well as balance sheet strength and trading liquidity. This helps us focus on the highest quality value stocks.
Data from the model is only the starting point of our process. We research every portfolio candidate to validate that these stocks have both the value attributes and long-term earnings potential that we seek.
In summary, our investment universe of 1,700 companies is screened to determine the top 30% of stocks having the most attractive valuations. These stocks are then screened by earnings growth and newsflow (earnings upgrades and price momentum) to ensure that the stock is not cheap for a reason. The worst 20% of this pool are then excluded. Ultimately, approximately 150 to 250 stocks are selected for the Japan Strategic Value strategy, depending on capacity at any given time.