Exuberance for popular market themes can drive unrealistic return expectations, with a total disregard of the starting price of an investment, Citywire AA-rated Dean Cashman has said.
Cashman, who runs the Eastspring Investments–Japan Dynamic fund, told Citywire Selector: 'In this environment, investors often overpay for perceived comfort, but overlook more attractively valued opportunities.'
Cashman said he is not concerned with the ‘popular market narrative’ but believes many investors are using to justify their holdings.
It’s this process which has led Cashman to stick with motor company Honda, despite the holding having hurt the fund’s performance year to date.
'After being a substantial underperformer since its peak in early 2011, Honda was identified as a valuation outlier as part of the team’s relative valuation screening process around mid-2014.
'Since 2011, shares had fallen on the back of a range of issues, such as the negative market sentiment associated with the Takata airbag recalls; ongoing rising capital expenditure costs and underperforming new models; as well as a deteriorating competitive environment in the US.'
Honda is the fund’s top position, with 5.9% allocated to the company. This is despite Cashman stating autos in general face a lower trend profitability due to increasing competitive pressures.
'Honda has been active in addressing some of the material risks to trend earnings, and has been moderating its geographical mismatch in productions capacity which is allowing great flexibility.
'In China, it has managed its capacity mix in reducing large SUV in favour of smaller models, its recent US model renewal has been positive and has strengthened its position.'
Cashman said the company has also been working to improve model profitability via synergies in production, which is one reason Cashman remains positive on the holding.
'While the market continues to focus on shorter term cyclical headwinds, which has affected sentiment, our confidence around our trend valuation assumptions has improved.
'We continue to respond to share price movement in a contrarian manner and as the portfolio is being amply compensated for observed risks to our trend fundamental assumptions, as well as the patient timeframe we may need to apply before the market begins to realise value for Honda.'
The Eastspring Investments – Japan Dynamic fund returned 49.70% in Japanese yen terms, over the three years to the end of February 2017. This compares with a 34.74% rise by its Citywire-assigned benchmark, the Topix TR, over the same time period.