However, savvier investors who have a high-conviction opinion on a certain area will increase or decrease their exposure, in order to get the scales tipping in their favour. This is the process used by the majority of fund-of-funds managers who attempt to beat their benchmark.
One of the highest-profile fund of funds managers – FE Alpha Manager Martin Gray – takes his convictions to another level. If he is particularly bullish on a region, he selects the fund that he believes is likely to return more than any of its peers in a rising market.
"[He] only invests in managers who do well when their area of investment does well," said Laith Khalaf, pensions investment manager at Hargreaves Lansdown.
"This sounds obvious, but not many managers do things this way. His [Gray's] philosophy is 'if I don’t think the UK will do well, I won’t invest in it, but if I do think it will do well, I want the manager who can give me the best possible returns'."
"They look to manage risk with their own asset allocation, but they want their managers to be the best they can be."
With this in mind, FE Trustnet looks at three funds that have a track record of performing strongly when the Japanese market does well – an area that has become more popular with investors in light of a recent surge in performance.
Legg Mason Japan Equity
Frequent visitors to the FE Trustnet homepage will notice that this £189m portfolio has become a permanent fixture in the top-performers list.
Our data shows it is number-one in the entire IMA unit trust and OEIC universe over one and three years, and second only to Fidelity UK Smaller Companies over five.
The manager, stockpicker Hideo Shiozumi, focuses on domestic companies at the smaller end of the market cap spectrum. He was one of the first to switch his portfolio out of manufacturers and into domestic stocks, which has worked out very well for his fund.
Performance of fund vs sector and benchmark
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Legg Mason Japan Equity | 83.2 | 171.18 | 201.86 | 112.06 |
| TSE TOPIX | 37.64 | 36.41 | 46.43 | 91.29 |
| IMA Japan | 37.59 | 38.06 | 49.19 | 77.23 |
Source: FE Analytics
Shiozumi has a particularly good record in rising markets, illustrated by his stellar returns of almost 70 per cent year-to-date, which compares with 31.81 per cent from the Topix index.
Performance of fund vs sector and index in 2013
Source: FE Analytics
It is a different story in down markets however, shown by its terrible run between 2006 and 2009.
Legg Mason Japan Equity is one of the most volatile funds of its kind, and has the highest max drawdown of any fund in the entire IMA universe – more than 85 per cent, our data shows.
It is therefore suited to the super-bullish, as small cap domestics are inevitably tied to the general sentiment surrounding the Japanese economy.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.96 per cent.
GLG Japan Core Alpha
This is another fund that is often tipped by those who are bullish about the Japanese equity market, but for a very different reason to its Legg Mason rival.
FE Alpha Manager Stephen Harker (pictured) is a deep value investor who focuses on the cheapness of stocks above all else. His fund has been invested predominantly in unloved large cap companies for some time, which have suffered in recent years as a result of a strong yen. This contributed to the fund’s underperformance in the down years of 2011 and 2012.
However, performance has begun to pick up this year, sending the fund to the top of the performance tables in 2013. Charles Stanley’s Rob Morgan says this could be set to continue as the yen continues to weaken on the back of the mass quantitative easing programme currently in force.
"Over the past few years, Japan’s larger companies such as autos and banks have experienced significant headwinds as the yen strengthened," he said. "These companies struggled, especially Sony, which was unloved by investors as they believed it to be dead in the water."
"He stuck by those companies and that view has started to pay off as the new prime minister’s policies have provided a boost for exports. This good news has filtered through and management teams are now posting bullish earnings forecasts."
"I think his fund is in a good position to carry on capitalising from this shift."
The fund has a very good record in steep rising markets, beating the Topix in the up years of 2005 and 2010. Harker has returned 37.96 per cent so far this year, putting him in the top quartile of the IMA Japan sector.
While Harker’s record in falling markets has been less strong, he is still well ahead of the Topix since he started running it in early 2006.
Performance of fund, sector and index since Jan 2006
Source: FE Analytics
GLG Japan Core Alpha requires a minimum investment of £1,000 and has ongoing charges of 1.66 per cent.
Baillie Gifford Japanese Smaller Companies
As has been the case for most regions in the last decade or so, small caps tend to outperform their large cap rivals during rising markets.
FE Alpha Manager John MacDougall, who heads up the £88m Baillie Gifford Japanese Smaller Companies fund, has a particularly good record in rising markets, smashing the returns of IMA Japan and the Topix index in the years of 2004, 2005, 2010 and so far this year.
The fund has held up well in down periods as well, which has translated in to strong cumulative returns over the long-term.
Performance of fund vs index over 10yrs
Source: FE Analytics
Rob Gleeson’s FE Research team rates the fund highly, and includes it as one of only two Japanese funds in the FE Select 100.
The team believes the fund is set to benefit from the modernisation of corporate activity which is currently taking place in the country.
"MacDougall likes to invest in companies run by the 'new generation' of Japanese managers," the team said. "These are more globally orientated and adopt modern management techniques, and tend to be found in internet-related sectors and the healthcare industry. He also invests in exporters, though they do not make up the bulk of the portfolio."
"This focus on the new generation of Japanese managers is to the fund’s advantage, as the country is experiencing significant cultural shifts."
"However, investors should be aware that the nature of this fund means it is likely to experience large fluctuations in value," they added.
Baillie Gifford Japanese Smaller Companies requires a minimum investment of £1,000 and has ongoing charges of 1.58 per cent.
