The five best-performing funds overall all sit in either the IMA Japan or IMA Japanese Smaller Companies sector. The Legg Mason Japan Equity fund led the way, with returns of 45.08 per cent.
Top-10 best-performing funds of 2013
| Name | Returns (%) |
|---|---|
| Legg Mason - Japan Equity | 45.08 |
| Invesco Perp - Japanese Smaller Companies | 35.62 |
| AXA - Framlington Japan Smaller Companies | 34.13 |
| Baillie Gifford - Japanese Smaller Companies | 30.46 |
| BlackRock - Global Funds Japan Small & MidCap Opportunities | 28.04 |
| Neptune - US Max Alpha | 27.72 |
| Legg Mason - Capital Management Opportunity | 26.91 |
| VT - De Lisle America | 24.94 |
| M&G - Japan Smaller Companies | 24.83 |
| Pictet Biotech | 24.3 |
Source: FE Analytics
The average funds in the IMA Japan and Japanese Smaller Companies sectors have delivered 19.51 and 27.87 per cent, respectively.
It is a similar picture in the closed-ended universe, with investment trusts in the IT Japan Equities and IT Japanese Smaller Companies sectors posting an average return of around 25 per cent.
Trusts benefit from gearing in rising markets, and narrowing discounts have also boosted returns.
Sarah Whitley’s Baillie Gifford Japan Trust is the standout closed-ended performer, with returns of 43.98 per cent.
Following close to 20 years in the wilderness, Japan is slowly growing in popularity among multi-regional fund managers, who have been rewarded handsomely for backing the out-of-favour sector so far this year.
FE Alpha Managers Martin Gray and Steve Russell, and Investec’s Alastair Mundy, are among the biggest admirers of Japan.
All agree that it is by far the cheapest global equity market and point to the reflationary policies of new prime minister Shinzo Abe as a possible turning point for the nation, which has been blighted by deflation for the best part of two decades.
It is not only Japan that has seen stellar returns year-to-date; equity markets have rallied throughout the world, with the FTSE All Share, S&P 500 and MSCI World all posting double-digit returns in 2013.
Performance of indices in 2013
Source: FE Analytics
The FTSE All Share is up 10.32 per cent year-to-date, marking the strongest opening quarter for the index since 1998, when it managed 17.62 per cent.
The US has been another standout performer, with the IMA North America and North American Smaller Companies sectors posting returns of around 20 per cent.
The Neptune US Max Alpha and Legg Mason Capital Management Opportunity funds both made it into the top-10 list for open-ended funds.
January’s announcement that the US had avoided the fiscal cliff was a big kicker for the market early on, and improving jobs and manufacturing data have kept equity prices buoyant since then.
Biotech funds and trusts have built on a stellar 2012, topping the performance tables once again. Both the Pictet Biotech and AXA Framlington Biotech funds have returned in excess of 24 per cent so far this year.
At the other end of the scale are commodities funds, which have been by far the worst performers of the year.
Gold equity portfolios have been particularly disappointing, with BlackRock Gold & General, CF Ruffer Baker Steel Gold and MFM Junior Gold all losing more than 10 per cent year-to-date.
Bonds have also been disappointing, although all five fixed interest sectors have still managed to at least break even.
Within individual sectors, in general it has been the cyclically focused portfolios that have led the way.
Mid cap funds dominate the top-10 list in IMA UK All Companies, with Ed Legget’s Standard Life UK Equity Unconstrained portfolio also making an appearance.
However, this is not to say that defensive portfolios have been left flailing.
While Neil Woodford’s Invesco Perpetual Income and High Income funds tend to lag their peers during rising markets, both are top-quartile performers in the UK Equity Income sector so far this year.
His colleague Mark Barnett’s Invesco Perpetual UK Strategic Income fund is number-one in the sector, with returns of 17.12 per cent.
Performance of funds vs sector in 2013
Source: FE Analytics
Adrian Lowcock (pictured), senior investment manager at Hargreaves Lansdown, says the fact that defensive managers are participating in the rally is a good sign.
"Banks and then tech drove the rally in the early stages, but during earnings season we’ve seen these areas come off a bit and other sectors have come into their own," he said.
"Three months is a very short period – you can flip a coin and Woodford could either be at the top or the bottom of the league tables."
"However, the fact that the rally has spread across a number of sectors is a sign that there’s more to it than just a 'dash for trash'."
"It’s not just a relief rally – there have been a number of drivers of performance."
"We’ve got unlimited quantitative easing, improving data in the US and China, and European policy has been much improved – bar the recent problems with Cyprus, where they made a bit of a mess."
Lowcock thinks it's unlikely that Japan will become vastly more popular with private investors any time soon.
"Even if there was a massive uptick in Japanese exposure, it's not going to make up a big proportion of sales overall," he said. "There are no Japan funds in our top-20 list, and I don't think that will happen for a fair while."
"It's not the first time Japan has had a very strong first three months. In the past it hasn't done that well beyond March, so it will be interesting to see how it fares this time around."
"The problem with Japan is that it's been such a poor performer for so long. It needs to go well beyond a rebound-rally for investors to flock to it in any significant manner."