When Abenomics – the raft of prime minister Shinzo Abe’s policies tasked with invigorating the Japanese economy - was first introduced at the end of 2012 markets rocketed over the next year.
Progress stalled at the start of 2014, although they bounced back in the second half with investors increasingly upbeat about the implementation of the policies as well as a shock announcement of greater quantitative easing from the Bank of Japan.
Bulls therefore arguably received a tacit nod from Japan’s electorate yesterday when Abe won a snap election widely seen as a vote for or against his flagship agenda.
However, with voter turnout low and Japan’s stock market falling on the news, investors may be left wondering if protection against the downside is more important than ever.
According to Simon Smith, chief economist at FXPro, the Japanese election results were always going to be about the margin of Abe’s victory, rather than about how the overall vote would go.
“The headline results were positive, with two-thirds of seats won in the lower house, but voter turnout was at a record low, which says a lot about voter apathy towards the further reforms Abe was supposedly trying to get a fresh mandate on.”
While past performance is not a guide to the future, FE Trustnet shines a light on the funds in the IMA Japan sector that have defended investor capital over the seven years of the past market cycle better than their peers as well as the index.
Looking at several key metrics – maximum drawdown, the Sortino ratio and how low a fund’s underlying beta is relative to the Topix – it is apparent that just two funds stand out relative to their peers over seven years.
The Sortino ratio, very similar to the Sharpe ratio, assesses risk-adjusted returns with a greater focus on the downside.
First off is the £600m Baillie Gifford Japanese fund, co-managed by Sarah Whitley and Matthew Brett. The former has been at the helm of the fund since November 2007 with Brett joining in June 2008.
It is top decile in the sector for Sortino ratio and maximum drawdown over seven years. Its beta, however, is third decile but at 0.8 is significantly below the index – always 1 – and the average fund in the sector, which has beta of 0.9.
It is top quartile over three, five and seven years from the point of view of total return. It has made 59.37 per cent over seven years compared to a sector average of 29.31 and a gain in the Topix of 32.45 per cent.
Performance of fund, sector and index over 7yrs
Source: FE Analytics
The FE Research team has include the fund in its FE Select 100 and, while mentioning its outperformance, highlights its defensive characteristics.
“Its focus on quality companies with sustainable growth potential has aided the consistency of performance since Whitley took over in 2007 and helped it to limit losses when Japanese equities fell in 2011. The fund did surprisingly well last year when the equity market rose sharply after Shinzo Abe’s election as prime minister,” FE Research said.
Top holdings include Softbank, Kubota and Mitsui with an overweight to industrials which make up 30 per cent of the portfolio.
FE Research says it expects returns to be highly consistent and less volatile than its peers due to its focus on such companies, although its future outperformance could be narrower than the recent past.
“The team takes a long-term view when it invests in companies; therefore, portfolio activity should remain low. Although the fund has done well over the last 12 months, it would be surprising if it can achieve the same level of outperformance in fast-rising markets.”
The fund has a clean ongoing charges figure (OCF) of 0.68 per cent.
Next up is the £95.6m M&G Japan fund, which has been managed by Dean Cashman since June 2006.
It is top decile for maximum drawdown and Sortino ratio but it is worse for beta, which stands at 0.96.
However, it has also been one of the sector’s best at putting money investors’ pockets with a total return of 61.09 per cent over seven years, more than double the return of the sector and index.
Performance of fund, sector and index over 7yrs
Source: FE Analytics
It is also top quartile over the past one, three and five years.
Top holdings include Sumitomo Mitsui Financial, Sony and Mitsubishi Financial, demonstrating its overweight to consumer products and financials.
The fund has an OCF of 0.68 per cent.
