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Vape expectations: why tech tobacco is the way to play Japan

Vape expectations: why tech tobacco is the way to play Japan

Sanlam FOUR’s Colin McQueen is tapping Japan Tabacco, despite recent underperfomance, to play Japan. 

McQueen, who co-runs the Sanlam FOUR Stable Global Equity fund with Gregg Bridger, Stephen Walker and Lorenzo Dicorrado, said there is still value in tobacco companies despite vaping eating into traditional cigarettes' market share.

Speaking to Citywire, Citywire + rated McQueen, who has around 4% of the fund allocated to Japan Tobacco, said: 'We previously owned Phillip Morris, which probably has the best tech in those smokeless products.

'I guess for us we have a very disciplined pricing philosophy, for every stock, there is a level in which it goes out of the portfolio and Phillip Morris crossed that for us.

‘By contrast, we found that Japan Tobacco has been suffering because Phillip Morris has a new technology called iQos, which is a heat not burn tobacco product that the company is trying to get registered with the FDA , as they are trying to prove it to be medically safer.'

McQueen, who has 2.8% of the fund allocated to Japan, said further developments from Phillip Morris weakened the share price of Japan Tobacco. However, this made the company attractive to the fund’s ‘value investor sensibilities’.

‘Phillip Morris has been testing in a couple of markets and Tokyo has been one of the key test areas which seems to have taken off really well. There are some really big tax advantages there and Japan Tobacco shares have been extremely weak off the back of that.

‘They do have their own competitor product which is coming out soon, called Ploom Tech. However, this has been delayed so they have been seeing a bit of erosion in their Japanese market share.’

The company has applied to the Japanese Minister of Finance to increase the price of its lower-end brands and is continuing to gain market share in the domestic market, despite its recent underperformance, McQueen said the company is more than capable.

‘The Ploom products seem to have different flavor characteristics which the Japanese consumers have been reacting well to in tests.'

The Sanlam FOUR Stable Global Equity fund returned 15.40% in US dollar terms, over the three years to the end of February 2017. This compares with a 22.65% rise, by its Citywire-assigned benchmark the FTSE World TR USD, over the same time period.

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