But with factors such as the IMF’s forecast for Chinese 2010 GDP growth of 10 per cent, investors face a question of whether to include Japan in their Asia Pacific investments.
Financial Express data shows that there are 69 IMA Asia Pacific excluding Japan OEIC and unit trust retail funds, against just seven including Japan, suggesting that investors prefer to control their exposure to Japan through a separate investment.
Volatility in both sectors is common, although it fares slightly better in the Asia Pacific including Japan sector where the average volatility level stands at 21.5 per cent compared to the Asia Pacific excluding Japan which is 25 per cent.
All funds in both sectors generate positive Sharpe, meaning the risk being taken on has been rewarded.
However, this also suggests that less risk taken on will result in less reward. And as the Asia Pacific including Japan sector is less volatile it also holds back total return; in this case 32.7 per cent over three years compared to Asia Pacific excluding Japan which returned 47.7 per cent in the same period.
Across individual funds, volatility ranges from 21-25 per cent for those which include Japan and 21-33 per cent for those excluding Japan. The best performers for each sector can be seen in the tables below:
Total Return custom table from UK Retail UT and OEICS universe (excluding Japan)
| Name | 1 year Cumulative Performance to Last Price |
3 year Cumulative Performance to Last Price |
Yield | 3 year Cumulative Ann. Volatility to Last Week End |
3 year Cumulative Sharpe to Last Week End |
| Schroder - Asian Alpha Plus TR in GB | 103.86 | 0.60 | |||
| Newton - Asian Income TR in GB | 75.29 | 41.10 | 4.29 | 23.25 | 0.33 |
| CF - Canlife Far East TR in GB | 72.38 | 79.33 | 0.00 | 29.13 | 0.57 |
| First State - Asia Pacific Leaders TR in GB | 59.50 | 68.65 | 0.84 | 22.33 | 0.65 |
| FTSE World Index TR in GB | 56.68 | 14.46 | 23.14 | 0.03 | |
| UT Asia Pacific Excluding Japan Retail TR in GB | 76.84 | 46.74 | 25.92 | 0.35 |
Source: Financial Express Analytics (data ranked by 1 year Cumulative Performance to Last Price)
Total Return custom table from UK Retail UT and OEICS universe (including Japan)
| Name | 1 year Cumulative Performance to Last Price |
3 year Cumulative Performance to Last Price |
Yield | 3 year Cumulative Ann. Volatility to Last Week End |
3 year Cumulative Sharpe to Last Week End |
| Smith & Williamson - Far Eastern Growth TR in GB | 79.43 | 35.59 | 0.91 | 24.61 | 0.25 |
| Invesco Perp - Pacific TR in GB | 73.45 | 45.43 | 0.36 | 22.56 | 0.38 |
| Baillie Giff - Developed Asia Pacific TR in GB | 71.92 | 1.27 | |||
| FTSE World Index TR in GB | 56.68 | 14.46 | 23.14 | 0.03 | |
| UT Asia Pacific Including Japan Retail TR in GB | 72.90 | 32.68 | 21.55 | 0.25 |
Source: Financial Express Analytics (data ranked by 1 year Cumulative Performance to Last Price)
Given the regional volatility regardless of inclusion or exclusion of Japan, investors may find it better to take on more risk for the increased prospect of superior returns. Including Japan mitigates volatility to such a minor extent, and diminishes returns; therefore those who wish for exposure to Japan would be better off investing in the country separately.
Tim Cockerill, head of research at Rowan agrees. He says Rowan has separated Asia Pacific and Japan, and that it currently prefers Asia Pacific excluding Japan.
"If you look at it in broader terms, the Asia Pacific excluding Japan region has the greater potential. Obviously geographically it’s that much bigger and it has a much more dynamic set of economies.
"Japan is not terribly dynamic, it has an aging population, which will be an issue albeit quite slowly."
Hugh Young, managing director of Aberdeen Asset Management Asia, says the Aberdeen Asia Pacific & Japan fund has been underweight Japan for more than 20 years. The fund currently has a 20 per cent weighting to Japan against an index weighting of 46 per cent.
"Although Japan is still technically the world's second largest economy, quite a few domestically-oriented corporations remain unattractive due to an inherent lack of competitiveness, while returns to shareholders have been relatively low."
Ian Vose, head of global development at Scottish Widows Investment Partnership, which manages two Asia ex Japan funds, believes it does make more sense to have a broader mandate which includes Japan as well as Asia because of the inter regional competition.
He says there are very specific industries such as automobiles and consumer electronics where there are a number of competing firms within the region.
Vose says the greater volatility in the Asia Pacific ex Japan sector is down to the development of markets and market infrastructure.
"In a lot of Asian markets, particularly the Asian emerging markets you do not get that well developed domestic infrastructure, whose job is to invest in domestic equities, so you tend to find domestic economic activity is very retail driven and very faddish."