Investing in Japanese equities has been one of the most rewarding places to park your cash of late with only UK smaller companies funds offering higher returns on average.
The average fund in the IA Japan sector has made a return of nearly 10 per cent in 2015, although the fact that most of these gains came within the first three months of the year shows that something has been going wrong since April.
While most Japan funds still sit in the top decile of returns for 2015 in the 3,000-plus strong Investment Association universe, nearly all have lost ground since April, in line with the TOPIX index.
Performance of sector and index in 2015
Source: FE Analytics
However, some of the pain could be about to be reversed. Japan funds have been rallying for the past few weeks and some market commentators have argued that the Japanese Central Bank could be about to move towards a fresh dose of quantitative easing (QE).
This was the broad cause of the rally at the start of the year and some investors argue that the market is likely to react favourably to another QE expansion.
Invesco Perpetual chief economist John Greenwood thinks QE in Japan could be ongoing for two more years thanks to recent data showing weak consumption, slow wage growth and the shock from China’s slowdown threatening to scupper the recovery.
Here we take at two portfolios playing almost opposite themes in Japanese stocks, for those looking to buy back or further into the market.
Stephen Harker has managed this £1.5bn fund for nearly 10 years, taking up the helm of the portfolio in January 2006.
The fund has returned 65.75 per cent over the past three years, beating the TOPIX index and the IA Japan sector average by more than 15 percentage points.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund is top decile over this period as well as over the past 12 months.
Adrian Lowcock (pictured), head of investing at AXA Wealth, is a big fan of the fund, believing it works well for an investor looking for a contrarian/value style as he says Harker is one of the most experienced in the space.
“It is a play against the traditional view of Japan that if the currency falls then you lose out because the currency takes away return,” Lowcock said.
“He was previously in the electronics sector for a while, a lot of them exporters. It is now a bit of a mixed bag. For example Canon is now its largest holding and that is a very export-focused business. You also have Honda.”
“It is very much focused toward banks which should mean more exposure to the domestic economy. He is a contrarian, a value investor. So he is going to pick the areas that are perhaps not fully recognised by the market yet.”
Lowcock says Harker’s portfolio construction reflects a sceptical view of the reformist polices of prime minister Shinzo Abe, dubbed Abenomics, which also makes it different from other portfolios within the peer group.
This has clearly helped more recently after the poorer performance of economic growth and inflation recently, two of the key targets of Abenomics.
“Harker remains circumspect about how successful Abenomics is going to be,” he said. “He isn’t anti-Abenomics outright and is still looking at the fundamentals of the business and their potential to make more profit as the currency weakens.”
The fund has a clean ongoing charges figure (OCF) of 0.84 per cent
Charles Stanley Direct’s Rob Morgan thinks this portfolio is a good bet for anyone backing a moderate or successful outcome for Abenomics, which would be apparent in a rally in the domestic economy.
The fund is bottom quartile over one year and third quartile over three years, having returned 43.25 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Co-managed by Scott McGlashan since 2004 and Ruth Nash since 2008, the fund has a bias towards medium-sized companies, notably those that the managers believe are undervalued because they are not well researched or understood, Morgan says.
This may go some way to explain that while over the past decade the fund has been a top quartile performer, it has seen more lacklustre run since Abenomics was introduced.
Morgan said: “The fund is biased to more economically sensitive areas such as financials and construction and away from defensives, which seem comparatively expensive at the moment. Clearly if there is a global recession this strategy would backfire, but there seems such good value in more cyclical areas that the potential upside outweighs the downside risk.”
In particular, he thinks there is a theme of ‘hidden’ property assets at play which could deliver plenty of upside should the economy show more assured improvement.
“If Abenomics does succeed, land and property prices should do well and there are a number of stocks the managers can find with unappreciated property assets on their balance sheets,” he said.
“With 95 per cent active share the fund looks completely different to the index, which I believe makes it a good diversifier for more traditional Japanese equity exposure, or indeed as a standalone fund for investors wanting a truly active approach.”
The largest holding include Bank of Yokohama, Fukuoka Financial Group and Shinmaywa Industries.
The fund has a clean OCF of 0.96 per cent