Over the past five years, the top two thirds of funds in the IA Japan sector have also cost the most, according to data from FE Analytics.
Japanese equity investors have had a tough time. Despite being the world’s third-largest economy, investors in Japan struggled to keep up with the returns of the broader stock market.
Over the past five years, the MSCI Japan index has delivered a total return of less than half that of the broader MSCI World index.
Performance of MSCI Japan vs MSCI World over 5yrs
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Source: FE Analytics
Investors who favour low-cost, passive investments might say there is no point in trying to pay-up to outperform a region’s equity market, particularly when the returns have been so poor.
However, there are some investors who might make an exception for Japan, where the divergence between the low-growth, old economy companies and the high-growth, new economy companies could create a favourable environment for active stock pickers.
Of the 20 funds with top-quartile five-year performance in the IA Japan sector, two thirds had ongoing charges figures (OCF) in the third and fourth quartile.
The below table shows all the funds across both the IA Japan and Japanese Smaller Companies sectors with sector-topping returns over five years. Those with charges in the second quartile are highlighted green, those in the third quartile yellow, and those in the fourth quartile red.
Source: FE Analytics
Although there are only eight funds in the relatively niche IA Japanese Smaller Companies sector, there was one fund that delivered both top-ranked returns and low costs: the Baillie Gifford Japanese Smaller Companies fund. However, its performance has lagged that of the sector over the past year.
The manager Praveen Kumar invests in smaller companies where he identifies businesses with the potential for good growth. He follows Baillie Gifford’s investment mantra of buying and holding companies for the long-term.
There were no funds in the IA Japan sector that offered a top-ranked low OCF and a top-ranked performance over five years.
The best performing fund in the sector was the FSSA Japan Focus fund, formerly the First State Japan Focus fund, which returned 130% over the period, more than triple the index.
Managed by FE Alpha Managers Martin Lau and Sophia Li, this fund has a high-conviction investing approach of backing quality large- and medium-sized companies in Japan, where its top-10 holdings account for almost half of its 41-stock portfolio. It has a second quartile OCF of 0.83%.
The next highest performing fund was the GS Japan Equity Partners Portfolio, which returned 112% over the period, with a fourth quartile OCF of 0.95%.
Like the previous fund, Goldman Sachs Asset Management’s Ichiro Kosuge also has a high conviction approach with just 32 holdings in the portfolio. The top-10 make up more than half of the portfolio.
Compared to the Japanese TOPIX index, the fund has roughly 40% more exposure to the Information Technology sector and almost double the exposure to the healthcare sector.
Although most of the top-performing funds were quality or growth orientated, there was one income-focused equity fund that featured in the list above.
This was the Jupiter Japan Income fund, run by Dan Carter and Mitesh Patel, who also run the Jupiter Japan Select fund.
Although they take a relatively concentrated approach like many of the other funds above, these managers place an emphasis on income as well as capital growth.
To do this, they focus on investing in financially strong, well-managed, growing businesses with competitive advantages. Some of these companies include globally recognised brands as Toyota, Sony and Softbank, which all feature in the fund’s top-10.
In the sector, there were only two actively managed funds with charges below the sector average OCF of 0.72%, as 29 passive funds brought down the average.
The Baillie Gifford Japanese fund (0.61% OCF) and the Lindsell Train Japanese Equity fund (0.71% OCF).
Lindsell Train Japanese Equity had a bottom-ranked five-year performance of 33.3%, whereas Baillie Gifford Japanese delivered a top-ranked return of 60.4% for the period.
The Baillie Gifford manager Matt Brett invests in high quality companies that he thinks can generate attractive and sustainable earnings growth, but an emphasis is placed on finding global leading businesses that trade on substantial discounts to their peers.