Japan has been a contentious investment destination over the past year as its prime minister Shinzo Abe unveiled a number of economic reforms designed to kick start the economy.
Investor opinion has been divided as to the execution of the reforms which Abe hopes will simultaneously steer the economy away from a deflation while also avoiding a derailment of its fragile recovery.
Coombs, who manages the Rathbone Multi-Asset Portfolios, says on a long-term view Japan is looking cheap and is 40 per cent cheaper than the US on a current price-to-book basis.
“Whilst we are not super-bullish on the region, Japan is trading on a significant forward discount to the US and we believe that there is value to be had. Also if you believe that the third quarter economic figures will be strong, then this dip provides a good entry point.”
Over the past year the Topix has been one of the worst performing developed market indices, having lost 0.81 per cent.
Performance of indices over 1yr
Source: FE Analytics
It has been slowly recovering since a sharp fall in April was prompted by a huge hike in prices due the imposition of a new rate of sales tax on consumer goods, the first rise in the equivalent to value added tax in 17 years.
The market has also taken a boost following the news that the Government Pensions Investment Fund, the largest in the world with $1.3trn of assets under management, is loosening its investment mandate to allow a greater amount of its assets to be invested in equities.
Coombs said: “2014 has seen some very mixed economic data out of Japan, but the recent reporting season was on the whole very positive. Japan has never been a straight-forward investment, but we believe that ‘Abenomics’ still represents a credible strategy and there has been some progress.”
However, the multimanager warns investors must still be aware that much will depend on the strength of the economy in the third quarter, as well as Abe’s decision to raise sales tax again.
“The success of the reform programme rests on a demonstration into the third quarter that the recovery remains on track.”
“Although possible boosts to GDP may come from agricultural reforms and increased defence spend, we should not forget that exports, industrial production and wages remain bugbears for Mr Abe, and these issues cannot be resolved overnight.”
“For that reason, we could see a good deal of volatility in the coming months. Investors will require patience.”
For a value play Coombs says the £319m Invesco Perpetual Japan fund is a good alternative to the £1.3bn GLG Japan Core Alpha - which has soft closed in recent weeks - due to its weightings in financials and the fact it remains on a reasonable valuation.
The fund, managed by Paul Cheeson, has 18.46 per cent in financials – its third largest sector bet after industrials and transport.
It largest positions include Honda, East Japan Railway, Cannon and Nissan.
Investors with a high conviction in a strengthening recovery of the Japanese market could opt for the £643m JOHCM Japan fund, Coombs adds.
“[It] is an excellent way to gain exposure, as it is perhaps the best positioned to benefit from a significant turnaround. The fund plays key recovery themes, but most of the ideas are at the lower end of the market-cap spectrum, where the potential for growth is significantly greater.”
“Moreover, this fund works as an excellent complement to many of the other recommended large-cap value funds by not holding the major players in the top 100, which feature so heavily in most other portfolios.”
For income investors Coombs says the £476m Jupiter Japan Income fund, one of the few income focused funds in the sector, would see a boost following a stronger performance in the market due to its exposure to small and mid-caps.
“Its overweight in financials has started to pay off, following a period of prolonged underperformance,” he said.
Over the past year the fund, managed by Simon Somerville, has shrunk almost 30 per cent. Its yield is currently 1.9 per cent.
Invesco Perpetual Japan and JOHCM Japan have both outperformed the sector over three years and stayed ahead of the Topix, while Jupiter Japan Income is behind both although it has scored top quartile for downside risk and volatility.
It has also accelerated over the past month, moving into a top quartile position for total return.
Performance of funds sector and index over 3yrs
Source: FE Analytics
On the investment trust side, Coombs says the Baillie Gifford Japan Trust would be a beneficiary of a pick-up in the market due to its focus on smaller and mid-cap growth names.
“It is trading around NAV, and if investors are able to get exposure at this level, or on a small discount, it is worth considering as the trust typically trades at a mid to high single-digit premium. Again, it works as an excellent complement to other names which hold very little in the large cap space.”
The trust is currently on a 4 per cent discount and has 15 per cent gearing.
He also tips the JPM Japanese Investment Trust, as he says its manager Nicholas Weindling remains confident of an end to a deflationary economy in Japan and that his funds are overweight in financials and property, expecting an looming bounce in consumer spending.
The trust is currently on a 13.2 per cent discount and has 14 per cent gearing.
The two trusts have returned 87.63 per cent and 35.62 per cent over the past three years although the former has seen significantly higher volatility, having lost more than 20 per cent in May 2013.
Performance of trusts, sector and index over 3yrs
Source: FE Analytics
Another multi-manager, JPM’s Tony Lanning who manages the Fusion fund of funds range, also recently increased exposure to a high conviction bet on Japanese equities.
He says that aggressive action from the Bank of Japan, ongoing corporate restructuring and positive earnings momentum will benefit investors in Japan.
