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Holly LaFon
Holly LaFon
Articles (7842) 

Hennessy Japan Fund Fourth Quarter Letter

January 31, 2014 | About:

With the Japanese market up so strongly in 2013, have equities become too expensive ?

Even though the Japanese market was up over 50% in yen terms in 2013, equity valuations are not expensive by historical standards. The current price-to-earnings ratio is approximately 16Xs and not expensive relative to other Asian markets. In addition, today's equity valuations are substantially below the huge premiums (30-40Xs price-to-earnings ratio) that investors paid for Japanese equities in the 1980s and 1990s.

Given the secular changes that are taking place within the Japanese economy and the expected continued devaluation of the yen, we believe that there is considerable continued upside potential in Japanese equities.

2. Led by Japanese Prime Minister Shinzo Abe, Japan is undergoing an economic transformation. Would you please comment upon which policies are taking hold and gaining acceptance versus policies that are proving harder to implement? Abe's "Three Arrows" of monetary, fiscal and structural reform that commenced in 2013 have begun to make an impact. Abe has proposed changes aimed at reducing regulations and stimulating private business growth. For example, one policy goal is to reinvigorate the Japanese economy by creating an inflationary environment. In the short-run, results from Japan's quantitative easing program (QE) and stimulus injection have become more apparent. A weaker yen has led to a surge in exports and is fueling real GDP growth.

However, some growth initiatives will take some time to see tangible results but early signs of progress are quite positive. After a stagnant economy for the past 20 years, inflation is rising and wages are starting to increase again – a necessary scenario to achieve sustainable GDP growth. As a result of the July general elections, Prime Minister Abe's party now holds a majority in both houses, which we believe will provide stable government over the next few years, uniformly focused on economic reform. Corporate profits are holding up well and tax incentives are in place to encourage households to hold more Japanese equities. In fact, the Government has just created a tax-exempt savings account for Japanese citizens that is designed to transition bank deposits into equity holdings. Traditionally, Japanese citizens have been savers and fixed- income oriented, holding only a small percentage of their financial assets in equities. We view these early signs as a plus and believe that Abe's efforts to reinvigorate the economy should be successful over time.

3. As a result of positive economic signs in the United States, the Federal Reserve has now begun to taper its asset purchase program. How long do you believe the Bank of Japan will continue its QE program and what factors will influence that decision? The focus in Japan is to establish an economic environment that includes an annual target inflation rate of 2%. We don't believe that the Bank of Japan will curtail its easing program until the 2% inflation rate becomes the norm. In a rising price environment, businesses and consumers are willing to spend now rather than wait as had been the case for many years in a deflationary environment.

With rising inflation, Prime Minister Abe has encouraged businesses to raise wages and many have publicly done so in the past year. The trickledown effect of modest inflation is meaningful as it impacts all areas of the Japanese economy. Individuals feel wealthier, businesses can raise prices and the weaker yen has led to an increased appetite for Japanese goods worldwide. The additional export demand is significant because of the number of industries that it touches and has positive ramifications for all areas of the Japanese economy. 

4. How have you positioned the Fund in an attempt to take advantage of the structural changes occurring in Japan?

As a fundamental, bottom-up manager our stock selection process has not changed as a result of the policies that the Government has employed. Over the past several decades, we have successfully managed assets in a variety of economic scenarios. 

As one of Japan's largest independent asset managers, we believe that our local presence and "feet on the street" research capabilities provide us with an information advantage relative to other international managers investing in Japan and relative to passive products. In general, we favor high-quality companies with multi-year growth prospects that are trading at a discount and have strong balance sheets that include low levels of debt. Often these companies tend to be more globally focused as Japan holds a leading position in many industries such as the global automotive and technology marketplace. Our Portfolio companies may include these global giants or an array of mid- cap companies that supply parts or components to these industries.

Investing , Uncompromised Q&A [ Comments and Opinions ]



Important Disclosures

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. This and other important information can be found in the Fund's summary and statutory prospectuses, which can be obtained by calling 800-890-7118 or visiting hennessyfunds.com. Please read the prospectus carefully before investing.

Mutual fund investing involves risk; Principal loss is possible.

Small and medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Investments in foreign securities involve greater volatility and political, economic and currency risk and differences in accounting methods. The Fund may participate in initial public offerings ("IPOs") which may result in a magnified impact on the performance of the Fund. IPOs are frequently volatile in price and may increase the turnover of the Fund, which may lead to increased expenses.

Each Morningstar category average represents a universe of funds with similar objectives. The Russell/Nomura Total Market Index is a market capitalization-weighted index of Japanese equities. The Tokyo Stock Price Index (TOPIX) is a market capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The Russell/Nomura Total Market Index and TOPIX indices are presented in U.S. Dollar terms. One cannot invest directly in an index. Morningstar Proprietary Ratings reflect risk-adjusted performance as of 12/31/13. For each fund with at least a three year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar risk-adjusted return measure that accounts for variation in a fund's monthly performance placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in distribution percentage. ©Morningstar, Inc. All Rights Reserved.

Past performance does not guarantee future results . Morningstar Risk scores for a given time period (three, five, or 10 years) reflect the Fund's Morningstar risk score plotted on a bell curve: Monthly calculations are based on whether the Fund scores in the top 10% of its category, its risk score is considered High; if it falls in the next 22.5% Above Average; a place in the middle 35% is Average; those lower still, in the next 22.5%, are Below Average and the bottom Low. Overall Morningstar risk score is a weighted average of the available three, five, and 10 year Morningstar risk scores. Investments with less than three years of performance history are not rated.

A Lipper Fund Award is awarded to one fund in each Lipper classification for achieving the strongest trend of consistent risk-adjusted performance against its classification peers over a three, five or ten-year period. Although Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Lipper. Lipper Analytical Services, Inc. is an independent mutual fund research and rating service. The award is specific to Institutional shares and does not apply to other share classes of the Fund. ©2013, All Rights Reserved.

Price-to-earnings ratio is the market price per share divided by earnings per share.

The Hennessy Funds are distributed by Quasar Distributors, LLC

Rating: 4.0/5 (2 votes)


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