Legg Mason IF Japan Equity, LF Morant Wright Nippon Yield and Schroder Tokyo are the most consistent IA Japan funds of the past decade, outperforming the sector average in eight of the past 10 years.
Of the 55 funds with a track record long enough to be included in the study, another four beat their peer group composite in seven of the past 10 years and another 13 beat it in six.
Performance of funds vs sector
Source: FE Analytics
Hideo Shiozumi has headed up Legg Mason IF Japan Equity since launch in 1996. He specialises in smaller and mid-sized companies, aiming to invest in those that demonstrate annual earnings growth in excess of 20 per cent, yet are still attractively valued.
Analysts at Bestinvest said Shiozumi aims to take advantage of Japan’s movement from an economy based on manufacturing to one that is more focused on services and the consumer.
“The fund has no exposure to the well-known Japanese manufacturers or banks. Instead the portfolio is focused primarily in service, retail and wholesale stocks that are benefiting from consumers' increasing use of the internet,” they said.
“Another theme in the portfolio is healthcare, which aims to take advantage of the ageing demographic in Japan.”
Legg Mason IF Japan Equity delivered by far the highest total return in the sector over the 10-year period. Its gain of 466.82 per cent is more than four times the amount made by the average fund and its TSE Topix benchmark and twice as high as the 200.31 per cent made by the IA Japanese Smaller Companies sector.
However, these exceptional returns have come at a price. Although outside the 10-year period in question, the fund lost 65 per cent between late 1999 and early 2003 and 80 per cent between 2006 and 2008.
Performance of fund since launch vs sector and index
Source: FE Analytics
The fund is £917m in size and has ongoing charges of 1.02 per cent.
Of the three most consistent funds, Bestinvest prefers LF Morant Wright Nippon Yield, which aims to deliver longer-term income growth while increasing the value of capital. It is currently yielding 2.73 per cent.
Morant Wright is a specialist investment boutique, founded by Stephen Morant and Ian Wright in 2006, that focuses solely on Japanese equities.
Bestinvest analysts said the team behind the fund aims to identify undervalued companies that have strong balance sheets.
“In addition, the fund seeks to generate a dividend yield above that of Japan’s Topix index, making it an option for investors wanting to draw an income as well as those looking to achieve long-term capital growth,” they added.
“The portfolio has a high weighting to mid- and small-cap companies, but the strong emphasis on valuation, balance sheet strength and dividends means the fund is generally more defensive than a typical Japanese smaller companies fund.”
LF Morant Wright Nippon Yield made 189.82 per cent over the 10-year period. The £600m fund has ongoing charges of 1.16 per cent.
Performance of funds vs sector over 10yrs
Source: FE Analytics
Analysts at FE Invest said Schroder Tokyo focuses on identifying individual companies with a strong brand, sound finances that involve safe levels of debt, management interests aligned with investors and a valuation that is cheap enough to be attractive if long-term growth expectations are met.
“The resulting portfolio is constructed with the benchmark in mind, which helps limit the risk the fund takes with its industry positioning,” the team noted.
“It will typically have around 85 holdings and has the freedom to deviate from the market although the risks taken are not typically significant. There are currency hedged share classes available; however, for unhedged UK investors, the returns can be heavily influenced by Japanese yen movements.”
The FE Invest team added that overall the fund provides broad exposure to the Japanese equity market and can be used as a core exposure to this area of the market within an investor’s portfolio.
Schroder Tokyo has retained its position on the FE Invest Approved Funds List even though manager Andrew Rose, who has headed up the fund since 2004 and has 38 years’ experience in the industry, recently announced he will retire in July.
Schroders said the appointment of Rose’s replacement, Masaki Taketsume, represents the execution of a long-term succession plan.
Nicky Richards, global head of equities at Schroders, said: “Taketsume is ideally placed to take on Andrew’s fund management responsibilities. We are confident that Masaki’s fund management expertise, supported by investment director Nathan Gibbs and the wider Japanese equities team, will ensure investment continuity for our clients.”
Rose and Taketsume have collaborated on portfolio management since 2014, with the latter’s relocation to London in 2017 a key step in the formal transition process.
Schroder Tokyo made 122.03 over the 10-year period in question. It is £2.35bn in size and has ongoing charges of 0.91 per cent.