Top-performing Orbis fund doubles holdings in Japanese stocks

Japan Times

07-05-2025

A top-performing global equity fund has more than doubled its exposure to Japan this year, making the move just as a strengthening yen boosts the outlook for domestic companies.
Japanese stocks made up 24% of the $3 billion Orbis International Equity fund as of end-April, up from just 10% four months earlier. The fund focuses on non-U.S. stocks and beat 99% of peers so far this year with a 16% return, according to data compiled by Bloomberg. It's also ahead of 99% of peers over three and five years.
A multiyear slide in the yen made the average investor "very unwilling' to buy shares of domestic Japanese firms, whose profits got crimped by rising import costs, said Bermuda-based manager Graeme Forster. That means those low-margin businesses were priced at depressed valuations in a cheap currency, he said.
"So you almost got discount on discount,' Forster said in an April 29 interview.
Now, the yen's fortunes have changed. Recent market turmoil drove investors to the currency as a haven asset, pushing its year-to-date gains against the dollar to about 10%. This means foreign investors that put money into shares of Japanese importers will reap two benefits at once: yen gains and improved earnings at these businesses.
About 4% of Forster's portfolio is in four Japanese drugstore operators — Tsuruha Holdings, Sundrug, Sugi Holdings and Welcia Holdings. He expects these firms to increasingly pass on rising costs to consumers as the country shakes off years of deflation.
Forster also sees the fragmented drugstore sector as poised to benefit from consolidation. In April, retailer Aeon announced a deal to buy Tsuruha, once it merges with rival Welcia.
But Orbis, which owns roughly 10% in Tsuruha, plans to vote against the merger during a shareholder meeting later this month, saying the deal undervalues the target. Tsuruha shares have risen 30% this year to slightly below Aeon's proposed acquisition price.
Forster's other Japanese stock holdings include beer producer Asahi Group Holdings, which he said is getting increasingly strong at capital management. In addition to buybacks, the beer brewer has pledged to pay out 40% of its net income this year as dividends.
He also owns a stake in developer Mitsubishi Estate, drawn to a sector now heeding investor calls to buy back shares, rather than pursue new construction. Inflation is benefiting real estate firms as rents climb, Forster added.
"Revenues rise and costs aren't rising commensurately, so you're seeing cash flows going up for the first time in a long time,' he said.
Strong gains in European defense and financial stocks have also propelled the fund's outperformance this year.
However, Forster said he has pared back some of these winning bets, exiting Germany's Rheinmetall, which has soared more than 150% year-to-date. At the same time, the fund manager retained positions in South Korea's Hanwha Aerospace and Japan's Mitsubishi Heavy Industries as he considers Asia's defense contractors to be relatively cheap.
Forster has turned more cautious on European banks for the time being, as the European Central Bank is poised to lower interest rates.
Forster prefers businesses that generate steady free cash flow — the likes of Shell and British American Tobacco. He expects equities will struggle to replicate the strong returns seen over the past decade, while tipping global long-term interest rates to climb as the United States rebalances trade. This is a setup that he predicts will suppress asset prices.
"If you can get a real 12, 13 or 14% free cash flow yield that is sustainable, that's all you need to do much better than the averages,' he said. "You don't need to figure out what AI is going to do. You don't need to worry too much about what (U.S. President) Donald Trump is going to do. Just find those businesses and own them.'