Legg Mason IF Japan Equity and T. Rowe Price Japanese Equity are the most consistent IA Japan funds of the past decade, beating the Topix, the most common benchmark in the sector, in eight of the past 10 calendar years.
Of the 53 funds with a track record of at least a decade, another five managed to beat the index in seven of the past 10 calendar years.
Performance of funds vs sector and index
Source: FE Analytics
While many of the funds that top the tables in this series tend to eke out small but consistent returns above those of their peers and benchmark, Legg Mason IF Japan Equity has taken a different route. Its gains of 701.17 per cent over the 10-year period in question are not only the highest in its sector – more than 450 percentage points above the fund in second place – they also make it the best-performing fund in the entire IA universe over this time.
Manager Hideo Shiozumi focuses on companies that can benefit from what he calls “a changing Japan” – an aging population, changing consumer lifestyles and “internet empowerment”.
As a result, he has a high exposure to medical & nursing care services, outsourcing businesses and e-commerce.
Dzmitry Lipski, investment analyst at interactive investor, is a fan of the fund, saying: “This is an adventurous option, with a bias towards small and medium sized companies focusing on profitable niches. The manager has a buy-and-hold, high conviction strategy that we rate highly. The fund could also be seen as a play on healthcare, since it has around 26 per cent exposure.”
Aside from beating the Topix in eight of the past 10 calendar years, it has beaten the IA Japan sector in nine of the past 10 years and the IA Japanese Smaller Companies sector in seven of these.
Legg Mason IF Japan Equity is not perfect, however. Its concentrated nature – close to 60 per cent of its assets are invested in its top-10 holdings – and focus on the lower end of the market cap spectrum means it can be highly volatile. It lost more than 80 per cent of its value between 2006 and 2008, for example, which the manager blamed on indiscriminate selling of small and mid caps, as well as blow-ups in some of the property companies he held.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is £1bn in size and has ongoing charges of 1.02 per cent.
Next up is T. Rowe Price Japanese Equity, managed by Archibald Ciganer, who aims to invest where growth is underpriced. Two-thirds of the portfolio is invested in stocks that have a secular tailwind, with competitive advantages stemming from brands, technology and industry positioning. The remaining third is invested in companies that are undergoing transformation, either through restructuring or a strategy change.
The FE Investments team said much of the fund’s success can be attributed to the manager.
“The fund leverages Ciganer’s local knowledge as he manages the portfolio from Tokyo,” it explained.
“When Ciganer took over as portfolio manager in 2013, he increased the portfolio’s exposure to growth companies, reduced the number of stocks and increased exposure to smaller companies.
“This has been positive as the fund’s alpha generation relative to the benchmark has improved considerably. The fund would be best suited to a portfolio with a long-term investment horizon as well as one that can tolerate medium to high volatility levels.”
In a recent note to investors, Ciganer claimed that improving productivity is key to addressing Japan’s long-term demographic issues, but fortunately the country is rising to the challenge.
“Efforts to boost productivity are being driven by both the public and private sectors in Japan,” he said.
“On the public side, a focus on broad structural reform is creating a more flexible and dynamic working environment, with increased workplace participation a key objective.
“Meanwhile, the private sector also understands the need to boost productivity in order to stay globally competitive. Companies are investing in new technology and systems with the aim of encouraging smarter, more efficient work practices.”
Data from FE Analytics shows T. Rowe Price Japanese Equity made 188.76 per cent over the 10-year period in question, compared with gains of 147.37 per cent from its Topix benchmark and 141.23 per cent from its sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is £190m in size and has ongoing charges of 0.91 per cent.
The funds that beat the Topix in seven of the past 10 calendar years are LF Morant Wright Nippon Yield, Baillie Gifford Japanese, AXA Framlington Japan, Lindsell Train Japanese Equity and Barings Japan Growth Trust.