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Three funds advisers are tipping for a surging Japan

13 November 2014

FE Trustnet reveals the Japan funds that are most popular with members of our AFI panel as well as being highly rated by Square Mile and FE Research.

By Daniel Lanyon,

Reporter, FE Trustnet


The case for Japanese equities has long divided investors but the prospect of strong returns has seen greater interest in the past few weeks, thanks to a shock move by the country’s central bank to hike its quantitative easing programme and its government pension fund upping its equity mandate.

The Bank of Japan said it would more than double the rate of its monetary expansion while the gigantic Japanese Public Pension Fund says it will boost its equity allocation from 12 to 25 per cent of its £750bn pot.

The main Japanese index – the Topix – has surged since then, following a volatile year and a more sustained rally over the past two years when the country’s leader Shinzo Abe unveiled plans to stimulate the beleaguered economy.

The Topix is now at a seven-year high after investors, many from abroad, scooped a record Y2.23trn of Japan shares last week following the announcements two weeks ago.

According to FE Analytics, over the past two years – the time since Abe was elected and launched his economic reform policies – the index has risen 37.01 per cent.

Performance of index over two years

Source: FE AnalyticsALT_TAG


While the outlook is uncertain, particularly as speculation builds that Abe will call a snap election in the next few weeks, FE Trustnet takes a look at funds that advisors and analysts tip as the best to play Japan’s contentious stock market.



Schroder Tokyo


This £1.4bn fund is held in such high regard by advisers that it appears in FE’s AFI Aggressive, Balanced and Cautious portfolios.

The portfolios are assembled using the endorsements of a 21-strong panel of experts in the financial adviser community.

Managed by Andrew Rose since 2004, Schroder Tokyo has returned 57.94 per cent compared to a sector average of 34.17 per cent and a gain in the Topix of 48.85 per cent.

Performance of fund, sector and index since 2004
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Source: FE Analytics

Industrials are the fund’s largest sector overweight with 28 per cent of the fund exposed. Toyota is its largest position at 4.4 per cent followed by Mitsui 3.34 per cent.


Fund research group Square Mile tips fund with its highest ‘AAA’ rating. It says with Rose managing the fund for over 10 years, it benefits from one of the most experienced Japanese equity managers and has remained competitive across a variety of market conditions.

“The fund is a core Japanese equities proposition that plays to the strengths of the manager and supporting team. It intends for stock research to be the primary driver of returns but within this there is some thought given to the bigger picture,” Square Mile said.

“Overall, the portfolio is well diversified and given the approach it exhibits a slight bias to value factors.”

The fund has a clean ongoing charges figures (OCF) of 0.92 per cent.



Baillie Gifford Japanese

This £585m fund also appears in all three of the AFI portfolios, is given an ‘AA’ rating by Square Mile and appears in the FE Select 100 list of preferred funds.

Over the past three years it has returned 50.17 per cent. By comparison the IMA Japan sector average over this period and the TOPIX were broadly in line, at 33.42 per cent and 36.74 per cent respectively.

Performance of fund, sector and index over 3yrs
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Source: FE Analytics

The five crown-rated fund is co-managed by Sarah Whitley and Matthew Brett. Whitely, who took over in 2007, was joined by Brett in 2008. Its largest sector overweight is industrials followed by hardware, which collectively make up almost half the portfolio.

FE Research says while the investment approach used by Baillie Gifford is nothing new, its high returns in recent years shows the team is adept at pulling it off.

“This highlights the efficient teamwork and superior knowledge of the Japanese equity market,” FE Research said.


“The team’s consistency [is a highlight as] the fund invests for the long-term and is happy sticking with a position over a lengthy period of time.”

The fund has clean ongoing charges of 0.68 per cent.



GLG Japan Core Alpha

GLG Japan Core Alpha features in both the AFI Aggressive and Balanced portfolios while FE Research has also added the £1.3bn fund, managed by FE Alpha Manager Stephen Harker, to its Select 100 list.

FE Research says Harker and his team have completely restructured the fund since they took control of the mandate in January 2006.

“All the team members have had long careers working on Japanese equities, to the extent that they are well known by the companies they aim to invest in; this gives them easy access to senior management,” FE Research said.

“The team’s contrarian approach can be a tricky one to understand, since they effectively sell their winning stocks and buy back into the losers, which are often companies experiencing a lot of bad short-term publicity.”

“However this style has proved to be successful and highlights the managers’ ability to on average buy near the lowest point and sell at progressively higher prices.”

The fund has returned 49.92 per cent since Harker took over, during which time the average fund in the sector and the index have seen largely flat performance.

It stayed ahead of the market between 2006 and 2009 when Japanese stocks fell as well as when markets boomed in the past few years.

Performance of fund, sector and index since January 2006
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Source: FE Analytics

Square Mile also rate it with its highest ‘AAA’ rating. The group says it has an excellent track record and management.

“We consider the fund to be a sound option for those investors seeking returns from Japan. Note that it can take time for the market to correct the valuation anomalies that the team identify. This coupled with the low turnover approach may mean that holders require patience,” Square Mile said.

“The managers previously applied the process to smaller companies for many years and demonstrated that the approach worked successfully across various market cycles. Since 2006, the strategy has been applied to larger stocks and it has enjoyed similar success.”

The fund has a clean OCF of 1.13 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.