Schroder Tokyo is an attractive option for investors who believe that the Japanese rally has further to run, according to analysts at Brewin Dolphin, who argue that the fund’s pro-cyclical positioning means it can capture further upside in the market.
While most investors agree that large parts of the equity and bond markets look expensive, many point to Japan as being one of the few pockets of remaining value – even after the rally that was sparked by the bold reforms of prime minister Shinzo Abe.
Since Abe won the 16 December 2012 election the Topix has risen 52.66 per cent, outpacing the 33.40 per cent rise in the FTSE All Share and the 48.67 per cent gain in the MSCI World index, which has more than half of its weighting in US equities.
Performance of indices since 16 Dec 2012
Source: FE Analytics
Japan has also been one of the strongest performing markets over 2015 so far, with a 15.89 per cent return in sterling terms over the year to date. The FTSE All Share has risen 9.29 per cent over this time while the S&P 500 is up just 3.36 per cent.
Ben Gutteridge, head of fund research at Brewin Dolphin, says investors should not think this recent outperformance suggests Japanese equities’ run is on the brink of flagging, as the market looks cheap compared with its peers and has a number of factors driving it.
“This year’s rally in Japanese equities has been particularly pleasing as it has not relied on a weakening of the currency to power it,” he added.
“The initial phase of prime minister Shinzo Abe’s three-pronged plan to reflate the economy leant heavily on the ultra-loose monetary policy implemented by the Bank of Japan to shock the system out of decades of deflation. This resulted in a devaluation of the yen of approximately 50 per cent, improving the competitiveness of corporates in the global market and boosting translated profits of Japanese multinationals.”
“However, the most recent leg of outperformance has been the result of Abe’s third arrow of structural reforms. Specifically, a renewed focus on corporate governance and profitability has resulted in a rerating of the equity market despite a marginally stronger yen.”
Japan’s new Stewardship and Corporate Governance Codes introduce a western understanding of ‘best practice’ for shareholders and management teams respectively. These sit alongside the new Nikkei 400 which has been designed to reward Japan’s best run and most profitable companies.
These measures have had success in bolstering investor sentiment towards Japanese equities and have had a good start in improving the country’s businesses. Brewin Dolphin highlights industrial robot manufacturer Fanuc as a “long-time poster child for Japan’s poor corporate practices” which has recently upped its game and lifted its dividend payout ratio while laying down terms for buying back shares.
The latest Bank of America Merrill Lynch Fund Manager Survey found that Japan and Europe are the two most popular markets with asset allocators across the globe and have been for some time now as areas such as the US started to look overvalued.
A net 42 per cent of global fund managers polled in the research are overweight Japanese equities while a balance of 18 per cent say Japan will be their top investment pick for the coming 12 months.
Retail investors are also showing more interest in Japanese funds. Data from the Investment Association shows the IA Japan sector captured £103m in net retail inflows in the March this year after taking £173m in new money in the previous month.
Monthly flows for the sector had been well below the £100m or in negative territory for the past year, as Japan remained unloved by retail investors in spite of the low valuations and supportive policy backdrop.
But for those now turning to the country and are optimistic about its future direction, Brewin Dolphin highlights the £2bn Schroder Tokyo fund. Andrew Rose has managed the portfolio since April 2004 and has focused on Japanese equities since his investment career started in 1981.
Gutteridge said: “Our preferred choice to access this market is currently the Schroder Tokyo fund. Managed by the vastly experienced Andrew Rose, the fund has a long track record producing relatively consistent outperformance through multiple market cycles. The manager currently shares our positive outlook for the market, and has therefore positioned the fund with a moderately pro cyclical bias.”
Over Rose’s time on the fund, it has outperformed both the average IA Japan portfolio and its Topix benchmark with an 88.92 per cent return. It has done this with less annualised volatility and a lower maximum drawdown than the sector and the benchmark; indeed, it is first-decile among its peers on both counts.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
In the past 10 years Schroder Tokyo has achieved first or second quartile returns in eight of them, with the only years of underperformance coming in 2013 and 2005. It is also first quartile over the year to date with an 18.56 per cent return.
Looking at positioning, the fund is overweight cyclicals such as industrials, consumer services and technology but underweight when it comes to consumer goods, financials and healthcare. Its top position is Toyota, followed by Sumitomo Mitsui Financial Group, Bridgestone and 4. Sompo Japan Nipponkoa Holdings.
As well as Brewin Dolphin, the fund is highly regarded by Square Mile Investment Consulting & Research, who has awarded it the top ‘AAA’ rating and also highlights Rose’s long experience as an attractive factor.
“With Andrew Rose having been at the helm for over 10 years this fund benefits from one of the most experienced Japanese equity managers in the industry,” Square Mile’s analysts said.
“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.”
“Overall, the portfolio is well diversified and given the approach it exhibits a slight bias to value factors. Nevertheless, it has remained a competitive proposition across a range of market conditions and we would view this fund as a very solid and wholly viable option for exposure to the asset class.”
Schroder Tokyo has a clean ongoing charges figure of 0.92 per cent.
