With total funds of just £711m, the IA Smaller Companies sector is one of the industry’s smallest by asset size, however, it also one of the best performers over five years, according to data from FE Trustnet.
From this study FE Trustnet discovered that Japanese smaller companies funds were ahead of their large cap peers by some margin, and updating the figures this continues to hold true.
Indeed, as the below chart shows, the average small-cap sector fund is 49.23 percentage points ahead of the average IA Japan fund over the past five years.
Performance of indices over 5yrs
Source: FE Analytics
As well as this, the sector is some way ahead of its MSCI Japan Small Cap benchmark (24.43 percentage points) and is the best performing of all the small-cap regions.
However, Premier Asset Management portfolio manager Simon Evan-Cook said the sector is more susceptible to statistical quirks, given that it is made up of just six funds – only five of which have a five-year track record.
“It’s that sparse because a few funds have been shut down in recent years,” he said.
“This will have been Darwinian in its nature, so not only are you not including the impact of the ‘dead’ funds – which were almost certainly weaker – but you’re also left with a selection of very good, highly active managers.
“I’d additionally suggest most of those funds have a growth bias, and small-cap growth stocks have been flying in Japan for several years now.”
Below, FE Trustnet lifts the bonnet on the five funds with a minimum of a five-year track record that remain in the sector.
The top performing fund in the sector is Baillie Gifford Japanese Smaller Companies run by Praveen Kumar since December 2015 with Felicia Hjertman added at the beginning of this year. Prior to this the fund was managed by John MacDougall.
The £350m fund has an active share of 93 per cent, meaning it looks very different to the MSCI Japan Small Cap sector, and an annual turnover of 19 per cent.
Overall, that invests in attractively-valued smaller companies that it considers have good growth potential, has returned 217.51 per cent over the last five years.
Since Kumar took over management the fund has returned 47.83 per cent – 7.64 percentage points ahead of the benchmark.
Currently, it has 26 per cent in consumer discretionary firms, 25.4 per cent in technology stocks and 23.6 per cent in industrials.
The fund has a yield of 0.48 per cent and a clean ongoing charges figure (OCF) of 0.63 per cent.
Performance of funds vs MSCI Japan Small Cap over 5yrs
Source: FE Analytics
Meanwhile, the four crown-rated M&G Japan Smaller Companies is also a ‘top quartile’ performer (second out of five eligible funds).
The fund is run by Johan Du Preez and deputy manager John Lothian though they both took over in September 2015, taking over from Max Godwin.
Over the last five years the fund has returned 176.85 per cent, since the managers took over it is up 64.33 per cent – 9.39 percentage points ahead of the MSCI Japan Small Cap index.
The £216m fund, which must have at least 80 per cent in smaller companies, is 22.3 per cent weighted to industrials though this is underweight its Russell Nomura Mid-Small benchmark.
The fund, which is made up 39 stocks, is most overweight consumer goods, financials and technology while most underweight healthcare and consumer services.
M&G Japan Smaller Companies has a yield of 0.97 per cent and an OCF of 0.94 per cent.
In the middle of the pack is the £49m Invesco Perpetual Japanese Smaller Companies, run by Osamu Tokuno.
The fund has returned 154.64 per cent over the last five years – good for third out of five funds – but has struggled over one and three years, where it is sixth and fifth out of six funds respectively.
In its latest factsheet, Tokuno said: “Although earnings growth in recent times has been dampened somewhat by companies’ foreign exchange assumptions and aggressive spending plans on capital and research & development, we believe investors’ expectations for the underlying corporate earnings growth of small and mid-sized companies will continue to tick-up in the medium term.
“Going forward, as geopolitical risks stabilise and the US trade protectionism threat recedes, the fund will continue to stick to its strategy of focusing on high growth small and mid-sized companies.”
The fund, which has 42.5 per cent in Japanese manufacturing companies, 24.1 per cent in services and 7.47 per cent in cash, has an OCF of 0.99 per cent.
Performance of funds vs MSCI Japan Small Cap over 5yrs
Source: FE Analytics
Towards the bottom of the sector is fellow four crown-rated fund Aberdeen Global Japanese Smaller Companies.
The £580m fund, which has been consistently in fourth place over one, three and five years, invests in companies with a value of less than 500bn Japanese yen (£3.5bn).
The portfolio is made up of 39 holdings, with its top 10 holdings accounting for 44.5 per cent of the portfolio which is 25.7 per cent invested in consumer goods and 23 per cent in industrials.
The fund has a yield of 0.6 per cent and an OCF of 0.93 per cent.
Finally, the only fund that has failed to beat the MSCI Japan Small Cap over the past five years is the BlackRock GF Japan Small & MidCap Opportunities, which has returned 125.09 per cent.
The four crown-rated fund is run by Hiroki Takayama, who assumed sole responsibility after former co-manager Kei Fujibe left in October 2015 who in turn had run the fund for three years.
The £494m fund must have at least 70 per cent invested in Japanese small- and mid-caps and is overweight industrials and technology while underweight consumer discretionary and consumer staples.
The fund is overweight small caps (46.75 per cent versus the S&P Japan MidSmall Cap index’s 42.86 per cent) and underweight mid-caps (48.70 per cent versus 57.14 per cent).
BlackRock GF Japan Small & MidCap Opportunities has been a better performer over the last year, returning 34.6 per cent – second in the sector) but has struggled over the longer term. It has an OCF of 1.07 per cent.