TOKYO – A top-performing Japanese fund is shifting its attention to railway operators from automakers on expectations that companies that rely on domestic revenue will fare better should the yen rebound.

Carmakers, among the Topix index’s best sectors in 2023, may start to face headwinds if a stronger currency reduces the value of their overseas revenue, according to the Eurizon Fund Sustainable Japan Equity fund, which is outperforming 94 per cent of its peers so far this year.

At the same time, gains in the yen would lower energy costs for railway operators, the fund said. 

Eurizon’s view on the currency suggests a possible adjustment to its strategy. A majority of the fund’s top 10 holdings were exporters, including Toyota Motor, Sony Group and Takeda Pharmaceutical, as at the end of September. Railway companies were not on that list.

Mr Joel Le Saux, who manages the €1.08 billion (S$1.6 billion) Luxembourg-based fund from Milan, said that in terms of the yen, “we are entering a major regime change that might last for years”.

Eurizon’s portfolio has returned 34 per cent so far in 2023, exceeding a 13 per cent gain in the Topix Net Total Return Index in euro terms.

During that period, the Topix sub-index that tracks automakers soared 26 per cent in euro terms with help from the yen’s depreciation, compared with a gain of about 1 per cent in the gauge that includes East Japan Railway and Tobu Railway.

Mr Le Saux also sees potential in railway stocks because inflation is likely to stay above 2 per cent, keeping the country from slipping back into deflation. Higher interest rates will have less of an impact on railway operators, as they have large fixed assets and infrastructure, he said.

More than two-thirds of economists polled by Bloomberg see the Bank of Japan scrapping its negative interest rate policy by April 2024, with half of the 52 respondents saying it would happen that month.

In addition to its objective to outperform Japanese equity markets, Eurizon focuses on environmental factors.

The fund tries to filter out companies that are highly exposed to commodities, while selecting stocks that are rich in cash flow and undervalued.

To help improve governance, it focuses on engaging with companies with excess cash, recommending that they buy back up to about 2 per cent to 3 per cent of shares over the next five years. BLOOMBERG