Japanese equities have been out of favour for some time now, but with valuations at near historic lows and the country's central bank finally showing a willingness to tackle deflation, it may be a good time to increase exposure to the region.

Despite difficult conditions, a number of Japanese managers have still managed to deliver healthy returns in recent years. The following funds have five FE crowns yet are still relatively unknown:


Legg Mason Japan Equity

This fund has recovered from its poor performance in the financial crisis to become the best performer in its sector over three years, with returns of 36.75 per cent. 

This is largely due to an exceptional 2011, when the team at Shiozumi Asset Management managed to make 27.07 per cent – the best figure in the sector – while the fund's Topix benchmark lost 11.76 per cent. 

Performance of fund vs sector and benchmark over 3-yrs



Source: FE Analytics

The fund is substantially more volatile than the sector average – with an annualised figure of 23.17 per cent over five years compared with IMA Japan's 16.44 per cent. 

It is highly concentrated, with just 33 holdings and 55.47 per cent of the fund allocated to the top-10 investments. 

Currently more than 50 per cent is in the IT and healthcare sectors, and management has a bias towards the smaller, less familiar Japanese companies. 

The fund had two dreadful years in 2006 and 2007, when it was the worst performer in the sector and lost 50.56 per cent and 34.27 per cent respectively, meaning that over 10 years it slips into the third quartile. 

Performance of fund vs sector and benchmark over 7-yrs



Source: FE Analytics

The question for investors is whether management has succeeded in turning around the portfolio; over five years it is the second-best performer in its sector, gaining 36.75 per cent.

At £49.49m it is the largest of the funds considered here; investors can gain access with an initial £3,000 outlay, while the total expense ratio (TER) is 1.93 per cent. 


Old Mutual Japanese Select

At £18.6m, this fund is tiny compared with the sector’s largest, which surpasses £1bn in assets under management. 

Over 10 years it is the fifth best out of IMA Japan's 35 funds, with a track record as long, while it is also a top-quartile performer over three years, delivering 13.66 per cent – the fifth-highest returns in the sector. 

However, it suffered substantial outflows in 2010 and 2011, which halved its size, despite being a top-quartile performer in the sector in both of these years. 

This may have been due to a bad 2009, when its losses of 6.58 per cent put it in the bottom quartile, even though the MSCI Japan benchmark lost a similar 5.4 per cent. 

The fund is managed by Ian Heslop, Amadeo Alentorn and Mike Servent, and maintains holdings diversified between defensive and recovery-oriented stocks.

It is available for a minimum investment of £1,000 and the total expense ratio is 1.82 per cent. 

Performance of fund vs sector and benchmark over 5-yrs



Source: FE Analytics


CF Morant Wright Nippon Yield

Many investors are looking to diversify their sources of income with overseas funds, and CF Morant Wright Nippon Yield has the highest yield of any fund in the IMA Japan sector, at 2.95 per cent. 

The £30.6m portfolio is a relative newcomer, having been launched in September 2008, but it has been a top-quartile performer in each of the three complete calendar years since then. 

Its three-year returns of 19.23 per cent are the fourth highest of the 59 funds in the sector, while over the same period the fund’s benchmark, the Topix index, made just 0.6 per cent. 

It is available with a minimum investment of £5,000 and has a TER of 1.91 per cent.