Two that have – Henderson Horizon Japanese Smaller Companies, and AXA Rosenberg Japan Small Cap Alpha are both FSA recognised offshore funds rather than onshore members of the IMA Japanese Smaller Companies sector.
The past 12 months have seen better performance, with the sector recovering to rank 14 out of 32 identified on Trustnet as of 5 October.
The top performer across IMA sectorised, offshore recognised and ETF products over that period is the AXA Framlington Japan Smaller Companies, Financial Express data suggest.
The £20m fund returned more than 65 per cent. And while it does not have a three-year history to measure as yet, the Alpha of 19.5 and information ratio of 2.9 suggest manager Chisako Hardie has been utilising good skill in taking the fund forward. Other Trustnet data suggest she has tended to do better in rising markets, which may explain the past year’s performance, although over more than eight years of fund management she has not necessarily underperformed peers in periods of falling markets.
Source: Financial Express Analytics
Hardie says that on the basis of valuations, investors should expect the performance of Japanese smaller companies to continue. "It's still very cheap," she says. For example, the Topix Small Cap index is trading on a price/book ratio of 0.8x, which is historically low. The Topix Second Section – which includes small and mid caps - is on a p/b of 0.7x.
Although prices for Japanese-listed small caps have bounced from their lows of about a year ago, Hardie says that they remain well off the peak seen in January 2006. The slide has been so precipitous that, for example, the Tokyo Mothers index of younger companies still has clawed back only some 15 per cent on its peak.
Investors have been promised many times that performance of Japanese stocks could be on the ascendency, but Hardie says there is something more fundamental about to happen in the economy as a whole that is likely to shift investor focus in terms of the types of companies and sector allocation going forward over the longer term.
Although initially sceptical, she says there are signs the new government recently elected is going to facilitate "a clear shift" away from a focus on physical infrastructure to one on 'quality of life' themes, such as healthcare, education and retirement services. Hardie says this is set to shift growth towards domestic service industries.
Manufacturing will remain important because of the capabilities of Japanese firms in areas such as new energy and energy saving technology, so, for example, smaller companies supplying the production equipment for larger manufacturers of solar cells will continue to win business, she says.
She says the opportunities in the sector will continue to be driven by a mix of sales to business customers as well as consumers.
Hardie’s fund is most exposed to the services (24 per cent), industrials (23 per cent) and technology, media and telecommunications (23 per cent) sectors, according to Financial Express data.
An example in the portfolio of a company deriving growth from domestic demand is Ain Pharmaciez. The company has been around for four decades, and saw sales continue to grow through its last financial year to 30 April 2009, with net income rising almost 32 per cent.
With Japan’s population ageing rapidly, the company’s focus on healthcare finds a willing market.