The M&G Japan Smaller Companies Fund invests in listed smaller Japanese companies to achieve sound capital growth over the long term. The fund manager applies disciplined and rigorous fundamental analysis during the selection process to ensure a high level of conviction around the valuation for each of the companies held in the fund.The fund manager adopts a value approach to investment and the fund owns shares in companies that have cheap valuations relative to the trend returns they are likely to generate over the medium to long term. These companies are quite often out of favour with the market for one reason or another. The fund’s investment approach therefore tends to be contrarian in nature.The fund manager sees value investing as a price-sensitive process that takes advantage of the mis-pricing of a company’s shares by the market. Whilst recognising that markets are generally efficient, the fund manager believes that market mis-pricings can and often do occur because human characteristics (such as fear and greed) may prevent investors from always assessing investments rationally. As a result, market prices do not always reflect fundamental values since they may over-shoot and under-shoot. For example, shares in companies become mis-priced when investors are willing to pay a high price for the ‘comfort’ of strong near-term earnings momentum and to be associated with success, whilst they will sell ‘unfashionable’ securities regardless of inherent value characteristics, such as healthy balance sheets and the likely level of longer term earnings. Such behavioural biases are evident in Japan’s equity markets today and can be systemically exploited. The fund manager aims to take advantage of these biases by adopting a disciplined, long-term investment approach.