Fund Objective

The investment objective of Neptune Japan Opportunities Fund is to generate consistent capital growth by investing predominantly in a concentrated portfolio of Japanese securities, with a view to attaining top quartile performance within the appropriate peer group.

View on Past Performance

Influenced by a combination of global and local factors, the Japanese market has continued its longterm decline, falling -16.9% over Q308. In sterling terms that translated into a drop of -7.4%, given the strong appreciation of the Yen. By contrast, the Fund rose 7.2% in sterling terms over the same period.This outperformance resulted from positioning the portfolio with conviction to reflect our longheld negative outlook for Japan. We had a relatively high cash position, low exposure to financials, and we hedged market risk through sales of TOPIX index futures.Earnings forecasts were hit by the global economic slowdown, particularly in the US and across the developing world, as well as by the strengthening Yen. Even Toyota has had to offer incentives on its vehicles in the US for the first time. Meanwhile, the banking sector is coming under severe pressure, as consumer and real estate credit activities are being hit by bad loan problems.

Future Expectations

Statistical releases confirmed the local economy was stagnating, with risks to the downside. Consumer sentiment continued to fall whilst the political situation deteriorated as support for Prime Minister Fukuda ebbed away. This is likely to trigger yet another electoral competition within the LDP party to determine who will replace Fukuda as its next leaderThe current frontrunner, Taro Aso, will most likely revert to an already discredited mix of public spending and tax-raising. None of this will be viewed positively by local or overseas investors. Corporate announcements provided little support for the market.Over the rest of 2008 the Japanese economy will drift lower but probably do better than other OECD countries, given its lower dependence on debt across the private sector. However, this will not be sufficient to support the market. As a result, we will maintain our defensive approach, taking highconviction measures to mitigate the risk posed to the portfolio by the market downtrend.

Fund Details