While Spear (pictured) agrees that the country has begun to look more attractive from an investment point of view since president Shinzo Abe began a program of wide-reaching economic reforms, he says it is still too volatile for all but the heavily diversified investor. “Last year was a good year for the Japanese economy and I want to believe it’s going to be a good year this year; however, better placed alternatives are pulling me and my clients’ money in other directions,” Spear said.
Spear says he prefers to gain exposure to Japan via a multi asset fund or a fund of funds, as managers can bring down their exposure to the region if they see clouds on the horizon.
Japanese funds don’t have this luxury however, as they must have at least 80 per cent invested in the region at any one time.
Following the unveiling of Abenomics in December 2012, equity markets rallied throughout 2013 but have since gone off the boil. Such volatility is the principle reason why Spear thinks Japan is best looked upon from the sidelines at the moment – particularly those with a short time horizon.
The Topix was ahead of both the FTSE All Share and the S&P 500 over 2013 but started to fall at the backend of 2013. FE data shows the index is down than 9 per cent since this time last year, and is behind both the UK and US indices since Abenomics began.
Performance of indices since Dec 2012
Source: FE Analytics
The quantitative easing measures as a means of reflating the economy is the principle reason for the equity market rally in Japan since the back end of 2012.
Spear says that the initial optimism came to a crashing halt first because of talk of quantitative easing coming to an end in the US, and then more seriously due to concerns over the likelihood of social reform in Japan.
Things have got even worse for Japan since the turn of 2014; FE data shows that IMA Japan and Japanese Smaller Companies are the two worst performing sectors so far this year, with losses of 10.72 and 8.03 per cent, respectively.
Only three funds in the IMA Japan sector have made money over the past 12 months: AXA Framlington Japan, Legg Mason Japan Equity and Neptune Japan Opportunities.
Performance of funds vs sector over 1yr
Source: FE Analytics
The Legg Mason and Neptune funds have both been more volatile than their sector and have lost more money so far in 2014, showing that their success has been down to their ability to perform so strongly in up markets.
“The biggest impact of Abenomics initially was from a currency point of view, with exporters relishing the weakening of the yen as a result of the extra monetary stimulus,” said Charles Younes, analyst at FE.
“Funds such as Neptune Japan Opportunities outperformed. It has also benefited from manager Chris Taylor’s active management of currency in his fund.”
“It was a risk-on period, and so the best performers were those with a higher appetite for risk and volatility.”
The AXA Framlington fund has managed to protect more effectively against the downside than the vast majority of its peers however, only losing 5 per cent so far this year – 5 percentage points less than its sector average.
For investors more sanguine on the potential for Abenomics to transform the Japanese economy, Spear recommends funds exposed to smaller companies growth. He points to Invesco Perpetual Japanese Smaller Companies as his favourite fund in the sector.
Younes believes that domestic-focused companies are likely to perform best if Abenomics is successful – especially given the poor run they’ve had recently.
“Looking to the future, the biggest factor influencing Japanese equity markets is whether or not it can push through its social reforms, and whether it can continue to inflate its economy and hit the 2 per cent inflation target,” he said.
“If so, it could be the domestic facing companies, many that haven’t performed so well, that do best.”
As well as Abenomics, Younes points to the slowdown in Japan’s trading partners such as China and the Philippines are a major headwind to performance.
