Legg Mason Japan Equity, Lindsell Train Japan Equity and First State Japan Focus are three funds that The Share Centre’s Tom Rosser & Teodor Dilov recommend for investors looking to gain exposure to the Japanese revival. 
Investment research analysts Rosser and Dilov that after two decades of economic stagnation Japan has been given “a new lease of life” in recent years.
“Once a firm favourite in every growth investor’s starting line-up; the country was plagued for over two decades by sinking wage growth, deflation and equity and property markets close to record lows,” said Rosser.
However, the election of Shinzo Abe in 2012 and the implementation of his package of reforms – dubbed ‘Abenomics’ – has led to enhanced corporate governance standards among Japanese businesses and helped stimulate the economy.
“The conversion of corporate codes has gone some way to encourage increased research & development investment, improved transparency and higher return on equity,” said Rosser.
“Under ‘Abenomics’, Japan’s economy is benefitting from rising real GDP, falling unemployment and female workforce participation rising – giving Japan its longest expansion since the second world war.”
Since Abe’s election, the Japanese Topix index has risen by 131.67 per cent, in Japanese yen terms, as the below chart shows.
Performance of index since Abe’s first election win
Source: FE Analytics
Rosser added: “Cheap valuations against both historical figures and other global markets make Japanese stocks a strong source of attractive long-term investments.
“Alongside the renewed prospect of returns for growth investors, Abe’s improvements to shareholder returns means income opportunities for investors are plentiful and definitely worth a punt.”
As such, Rosser and Dilov have highlighted three funds below for investors to consider.
Legg Mason IF Japan Equity
First up is the £986.4m Legg Mason Japan Equity fund managed by Hideo Shiozumi of Tokyo-based asset manager Shiozumi Asset Management.
Shiozumi invests in a concentrated portfolio of around 30-40 stocks, 80 per cent of which are long-term holdings typically held for two-to-three years.
The remainder are made up of tactical holdings based on short-term factors and are usually held for up to one year. All are high growth stocks, trading at ‘reasonable’ valuations with good cashflow and well-capitalised balance sheets.
Typically these companies come from sectors exploiting the transformation in Japan’s services industry and retail/distribution network.
While the manager has generated superior returns and lower turnover, due to the concentrated nature of the portfolio there are periods when performance is very marked or divergent which can contribute to high volatility of returns relative to the benchmark.
“Managed by one of the most prominent experts in this field, it has an extremely successful track record of delivering excess returns over the full market cycle,” said Dilov.
“Shiozumi is an ex-manager of Japanese investment at George Soros’s funds and currently runs a concentrated portfolio of across the market cap invested strategy.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over the past three years to 19 September, the Legg Mason IF Japan Equity fund has made a total return of 45.76 per cent, compared with a 29.94 per cent gain for the average IA Japan peer and a return of 29.70 per cent return for the TSE Topix index.
The fund has an ongoing charges figure (OCF) of 1.02 per cent.
Lindsell Train Japanese Equity
Next up is the £418.5m, five FE Crown-rated Lindsell Train Japanese Equity fund, which is overseen by FE Alpha Manager Michael Lindsell, who aims to build a portfolio of ‘exceptional’ companies with a focus on those with ‘truly sustainable business models’ or established resonant brands.
As such, Lindsell’s portfolio is largely made up of consumer franchises, which represent 45.3 per cent of the holdings, while media & software make up 25.9 per cent of the fund currently, while pharmaceuticals (including healthcare) represent another 19.8 per cent.
It’s top holding is Nintendo, a global leader in the video games industry, which represents 9.5 per cent of the fund’s portfolio.
“Lindsell Train Japanese Equity is a slightly more conservative fund, which seeks to appreciate its shareholders’ capital over the longer term by investing in a highly concentrated portfolio of equities,” said The Share Centre’s Dilov.
“Lindsell has intimate knowledge of his stocks due to the rigorous screening process, leaving him with a smaller pool to choose from.”
Over three years the fund has made a total return of 44.96 per cent. It has an OCF of 0.73 per cent.
First State Japan Focus
The final name on The Share Centre’s list is the £16.2m First State Japan Focus overseen by Sophia Li and FE Alpha Manager Martin Lau.
Launched towards the end of 2015, the managers take a disciplined approach to investing and targets large- and mid-cap Japanese businesses with a market cap of at least $1bn.
From a starting universe of 3,500 names, once the market cap requirements are applied the universe is whittled down to just 400.
From this group, First State’s Japanese equity team applies quantitative and qualitative analysis, regularly holding direct meetings with the management of many companies of companies in its smaller universe “to fully understand the quality, growth and valuation”.
From this the team generate a concentrated portfolio of names where the top-10 holdings typically represent 40-50 per cent of the portfolio.
“The fund's portfolio could be very concentrated depending on manager’s market outlook and conviction,” noted Dilov.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
First State Japan Focus has made a total return of 52.75 per cent over the past three years and has an OCF of 1.03 per cent.