Morningstar Magazine - December 2017/January 2018 - 27

program. Total net assets for active and passive
funds in the bonds EUR corporates Morningstar
Category increased from more than EUR 36.9 billion
in 2009 to almost EUR 154 billion as of August,
with a cumulative net inflow of EUR 72.4 billion.
Over the past three years, one of the main
beneficiaries of inflows among active managers
has been Schroders. The Schroders Euro Corporate
Bond and Euro Credit Conviction funds received
close to EUR 4.6 billion in inflows.
Given these challenges, it's important to
monitor portfolios for signs of capacity constraints,
though optimal capacity levels will vary. For one
thing, the size of the universe differs per asset
class and so does liquidity. Even within a particular
asset class, the optimal capacity tends to differ
per investment style. For example, a diversified
or low-turnover strategy is likely to have a higher
capacity level than a high-conviction or highturnover investment approach. A strategy's size as
a percentage of the total investment universe
(the fund's market share), and the time period it
would take to liquidate the entire portfolio, provide
some broad guidelines.
Warning signs that could indicate a fund
has outgrown its capacity include diminishing
active returns and significant changes to
the fund's tracking error, active share, R-squared,
and the number of portfolio holdings compared
with the benchmark. Sound capacity management
reflects good stewardship, as it protects fund
investors' interests. Prudent fund companies
will have a systematic capacity-monitoring process
and a record of closing funds before capacity
is strained.
Several large European corporate bond funds
have taken measures to stem new inflows
by soft-closing their strategies. Schroders, for
example, implemented a soft close for the
Bronze-rated Schroders Euro Corporate Bond fund
after assets reached EUR 10 billion earlier this
year, showing its commitment to maintaining
the quality of its bottom-up investment approach.
Early in 2016, Dutch asset manager Kempen
initiated a soft close of Silver-rated Kempen Euro
Credit Fund when assets reached EUR 5.5
billion. This conservative capacity limit is warranted
by the fund's relatively concentrated strategy.

By soft-closing their strategies, Kempen and
Schroders have been very prudent given
their modest market shares compared with the
size of the European corporate bond universe,
which stands at EUR 2,100 billion in terms
of market value (based on the ML Euro Corporate
Index). More important, we haven't seen any
signs indicating style inconsistencies as a result
of their growing assets. We observe no significant
changes in either fund's R-squared relative to
the Markit iBoxx EUR Corporate Index; the number
of portfolio holdings continues to be stable for
both; and their active returns, as demonstrated by
Sharpe ratios, remain strong.
.
Niels Faassen is a senior analyst with Morningstar Manager
Research Services EMEA, based in Amsterdam.

External Demand Drives
Winners in Japan
ASIA

Japan
Given our view that structural reform in Japan
will be slow, we prefer Japanese companies with
global expansion opportunities. Recent results
from some companies point to strong demand from
Asia and particularly China, especially for higher
value-added goods. "Made in Japan" brands
should continue to resonate with Asian consumers
looking for high-quality products, and Japan's
tourism push will build regional awareness
of these brands. We think this trend will continue
over at least the next five years, led by demographic changes in China that should sustain its
drive to mechanize, as well as rising wealth
in Asia to boost spending on inbound tourism in
Japan and on Japanese goods externally.
Not all Japanese exporters will benefit. No-moat
consumer electronics companies have not seen
their emerging Asian sales grow in the same
manner in the past seven years as others eat into
their market shares. As a result, we prefer to
stick to local leaders with strong intangibles that
can be exported to other markets, as well as

those that benefit from switching costs.
Firms with such moats should benefit
disproportionately as homegrown competition
remains a threat.
There are several names that we like especially
for their exposure to external demand that
we view as sustainable over the next five to 10
years. We think it's important to look at external
growth opportunities, given Japan's shrinking
population, which will put pressure on domestic
demand growth. Because structural reform policies
aimed at tackling these challenges are still not on
the table, we prefer to focus on potential gains
from the government's continued focus on driving
inward tourism to boost growth.
The upcoming Tokyo Olympics in 2020
should further raise Japan's profile. We like the
ability of wide-moat-rated Kao, the largest
consumer product manufacturer in Japan, to
build its brand regionally. Narrow-moat-rated
dairy company Meiji Holdings should also
benefit. Tourism goodwill from the Olympics will
likely also lead to the construction of integrated
casino resorts. Local entities could benefit,
especially leading commercial real estate firms
such as Mitsubishi Estate, which is a
potential joint-venture partner for global
casino operators.
The aging labor force in both Japan and China
will support strong growth for manufacturing
mechanization. Nidec and Fanuc are industrial
companies benefiting from rising factory
automation. Industrial robot sales are expected
to see double-digit growth over the next
five years, and we expect Fanuc, as an industry
leader, to benefit as it completes its factory
expansion. We remain keen on wide-moat Fanuc
with an appropriate margin of safety. Nidec,
currently on our Global Best Ideas list, produces
precision motors for industrial robots and
electronic vehicles; its widening product mix
is underappreciated.
Lorraine Tan is director of Asia equity research for
Morningstar, based in Singapore.

global.morningstar.com/Morningstarmagazine

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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018

Contents
Morningstar Magazine - December 2017/January 2018 - Cover1
Morningstar Magazine - December 2017/January 2018 - Cover2
Morningstar Magazine - December 2017/January 2018 - 1
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Morningstar Magazine - December 2017/January 2018 - Contents
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