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Investment views

Why the best offence can be a good defence

22 March 2018
By Jason Barbora, Assistant Portfolio Manager

Jason Borbora, Assistant Portfolio Manager at Investec Asset Management, discusses the quiet recovery of the Japanese economy and the investment case for the Yen.

Finding alternative forms of defence

Defence case study on our holding of the Yen


Investors in the Investec Global Multi-Asset Income Fund will know that it is built from the bottom-up, with investments chosen for their own merits and classified according to their behaviours rather than their names. This means we classify potential investments as Growth, Defensive or Uncorrelated assets.

This classification raises an obvious conundrum: should an asset be bought for the hope of diversification even if it might lose money? We strongly believe in not doing this, as it would be contrary to our philosophy of only holding positions which can contribute to returns.

This has been a particular issue over the last quarter given that developed market government bonds are often seen as the primary means of diversification in portfolios. The team, however, has been wary of them (in particular treasuries) because at this point in the cycle the background of US tax-cuts, inflation showing signs of ticking-up globally, and inter-region synchronised growth suggesting that yields had scope to rise and perhaps exhibiting a stronger relationship with equities than investors typically assume.

As a result, over the last quarter, the Fund has run an overall duration which is at an historic low. However, as we seek to ensure that each holding adds value in its own right, our analysts have found interesting ways of diversifying the portfolio.

One such example is our holding Yen.

The Yen as a Defensive asset

Historically, as shown overleaf, the Yen’s performance during times of market volatility has meant it is classified by our analysts as a Defensive asset. This is because Japanese investors typically repatriate the money they had put to work overseas when the general investment environment deteriorates, prompting the Yen to rally during ‘risk-offs’.

The Yen has historically appreciated in risk-offs

31.10.08 -19.8% 7.8%
31.08.98 -14.0% 3.8%
30.09.08 -12.5% 2.5%
30.09.02 -11.0% -2.8%
28.09.90 -10.4% 4.1%

Source: Bloomberg, as at 31.01.18.

So whilst the Yen has attractive defensive characteristics, we also believe it can add positively to the performance of the Fund, based on a number of factors described below.

The Yen: Cheap, unloved, with improving policy support


The Yen is marked as cheap on each of the three primary measures of valuation employed to assess foreign exchange fair values. These three measures (Fundamental Equilibrium, Behavioural Equilibrium, and Real Effective Exchange Rates) consider the appropriate rate for a currency given factors such as the balance of its financial accounts or inflation and on average suggest that the Yen is about 13% cheap (the second least expensive currency under coverage).


Monitors of Japanese economic data covering varying aspects of the economy (from inflation, to employment, and surveys of sentiment) all confirm a healthy picture. In fact the country has seen seven consecutive readings of economic expansion, thirteen straight months of export growth, and sixteen months of manufacturing PMIs above 50. All of this translates into very positive scores for Japan on our Inflation and data monitors. This conclusion is confirmed by analysts from the equity research group who see improving earnings dynamics from domestically-focused companies and better sentiment from their meetings with company management. Because of this our analysts think the Bank of Japan is further along the line to tapering their programme of quantitative and qualitative easing embarked upon in 2012 than the market expects – this could lend a great deal of support to the Yen.

Market Price Behaviour

Sentiment and positioning: Positioning data from five sources confirm that investors are underweight the Yen. Some of this relates to Japanese capital being employed off-shore to benefit from the higher rates of interest available elsewhere, this affects the behaviour of the Yen. Much of the remainder comes from international investors ‘shorting’ the currency in accordance with the consensus opinion that the Yen should weaken due to the Bank of Japan’s quantitative easing programme – something our analysts believe to be wrong. We believe that there is a substantial pool of capital ready to chase the Yen.

Momentum: The Yen has outperformed the US Dollar by around 5% over the last year and even against the background of a resurgent Euro has outperformed an index of currencies weighted by its trading relationships by around 3% over the last quarter. Momentum is an important aspect of any security’s analysis as it recognises that the market often contains more information than is appreciated and is a powerful factor in explaining returns across most asset classes through time. Importantly our Alternative Risk Premia team also note a lowered correlation between the Yen and Treasuries.


In our Investec Global Multi-Asset Income Fund we currently have around 7% exposure to the Yen. We believe the Yen has good defensive qualities and potential for good gains. It also means that the Fund has less reliance on government bonds to provide defensive protection as shown in the percentage contribution to fund risk charts below. Further, it shows the best offence can be a good defence.

Figure 1: We vary the balance of exposures to reflect cyclical opportunities and risks

This portfolio may change significantly over a short period of time. Percentage contribution to risk.

Why choose this fund?

A defensive, diversified portfolio with exposures tactically adjusted to suit a changing environment

Targets ‘bond-like’ volatility, focusing on limiting downside risk

Resilient portfolio built from the bottom up aiming for attractive income with capital growth over the long term



Important information

All information is as at 31.12.17 unless stated otherwise. Asset allocation and yields as at 31.12.17. All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long-term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the Manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act.


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