Lindsell Train Japanese Equity, AXA Framlington Japan and GAM Star Japan Equity funds are among the best performing Japanese equity funds since Shinzo Abe became prime minister in 2012.
Approaching his fifth anniversary as prime minister, Abe has secured a mandate for further ‘Abenomics’ after winning an increased majority in the Japanese Diet this month.
Abenomics – the economic policy programme designed to revive the Japanese economy – has started to bear fruit more recently, with inflation under control and unemployment low.
The third ‘arrow’ of the programme – aimed at the third largest economy’s growth strategy and structural reform – has proved more difficult to implement, but having secured a larger majority can now push on with changes.
“We see the outcome as a mild positive for Japanese equities, though recent strong performance may spark some profit taking,” analysts at BlackRock Investment Institute noted.
“We like Japanese shares thanks to the synchronised global expansion supporting growth, attractive valuations and solid earnings momentum.”
The Japanese market has been among the best performers over the past five years with a 153.8 per cent rise, compared with a 93.5 per cent gain for the S&P 500 index and a 53.96 per cent increase for the FTSE 100, in local currency terms.
Performance of IA Japan sector vs index over 5yrs
Source: FE Analytics
The fund sector has also been among the best performers over the past five years, in sterling terms. Indeed, the IA Japanese Smaller Companies sector is the best performer over the time frame with a 162.36 per cent total return.
After the IA North America peer group’s 117.89 per cent return, the IA Japan sector is the next best-performing large cap-focused sector. Over five years, the average IA Japan fund has returned 112.32 per cent, compared with a 115.77 per cent rise in the Topix index, as the above chart shows.
However, with a strong showing by the Japanese market during Abe’s tenure, FE Trustnet decided to find out which funds have added the most alpha through active management over the period.
As such, we considered the funds outperforming the main Japanese market, the Topix, and then filtered for funds that had achieved top quartile figures for information ratio (which assesses the degree to which a manager uses skill and knowledge to enhance the fund returns), alpha generation (which measures returns made in addition to a benchmark) and maximum drawdown (the most money lost if the fund was bought and sold at the worst possible times).
We further screened out the funds that had the highest correlation to the index represented by the r-squared figure. It should be noted, however, that not all IA Japan funds are benchmarked against the Topix.
The results left five funds: AXA Framlington Japan, CF Morant Wright Nippon Yield, Fidelity Japan Smaller Companies, GAM Star Japan Equity and Lindsell Train Japanese Equity.
The best performing fund since Abe’s second election stint as prime minister began was the five FE Crown-rated AXA Framlington Japan fund, managed by FE Alpha Manager Chisako Hardie.
During the period the fund rose by 161.63 per cent compared with a 122.18 per cent rise for its FTSE World Japan index and a 106.44 per cent rise for the average IA Japan fund.
Performance of fund vs sector & benchmark since December 2012
Source: FE Analytics
Hardie joined the £206.3m fund in 2006 and targets long-term capital growth through a diversified portfolio of stocks from across the market cap range, explaining its low correlation to the market capitalisation-weighted Topix.
Of the five funds, the fund had the best maximum drawdown figure of 7.29 per cent and had the best information ratio figure of 0.19.
“Corporate Japan’s earnings trend is strong and equity valuations are attractive,” Hardie wrote in her most recent fund factsheet. “Once political visibility improves, we believe the market will be strong into year-end.”
The fund has an ongoing charges figure (OCF) of 0.85 per cent.
Next on the list for performance was Michael Lindsell’s Lindsell Train Japanese Equity fund, which generated a total return of 153.79 per cent over the period since Abe’s election to office.
The five crown-rated fund had the best alpha generation figure of 0.19 and had the lowest r-squared ratio of 0.04, due in part to the falling yen acting as a tail wind for its returns.
Lindsell has managed the fund since 2004 and aims to deliver long-term performance through a low-turnover, concentrated portfolio of 20-35 stocks. Unlike the AXA Framlington fund, Lindsell Train’s strategy is benchmarked to the Topix.
“With Abe sustained in power, and [Haruhiko] Kuroda, the Bank of Japan governor, likely to serve another term from February, it seems there is little chance of change in the super loose monetary policy,” noted Lindsell recently.
“The Bank of Japan’s ongoing buying of the stock market both directly and through ETFs (the BOJ owns 70 per cent of all ETFs outstanding and is buying 1 per cent of the market per annum) means that some investors think that a floor has been placed below the market which would only be breached if circumstances change substantially.
“It also means that market volatility has lessened and, with it, trading activity.”
Performance of fund vs sector & benchmark since December 2012
Source: FE Analytics
The fund has an OCF of 0.85 per cent.
Jun Tano’s Fidelity Japan Smaller Companies fund returned 149.89 per cent over the period and is the next best performer.
Unlike other smaller companies-focused funds, the four crown-rated fund sits in the main sector with large -and mid-cap-biased peers. As such, the fund is benchmarked against the Russell Nomura Mid Small Cap index and not the Topix.
The fund has been managed by Tano since 2006 and, as would be expected, has a bias towards mid- and small-cap Japanese companies. It also has the freedom to invest outside of its principal geography.
Tano follows a bottom-up investment approach based on in-depth fundamental analysis, favouring companies with a strong competitive position in a growing business segment and solid business model.
It has the second-highest information ratio figure of 0.17 after the AXA Framlington fund and has an OCF of 0.99 per cent.
Finally, the GAM Star Japan Equity and CF Morant Wright Nippon Yield funds have both delivered returns of around 126 per cent and are both four crown-rated.
The £168.2m GAM fund is managed by Ernst Glanzmann and Reiko Mito, who have managed the fund since June 2015.
The Topix-benchmarked fund employs a bottom up process and has a long-term investment horizon of more than five years. It has an OCF of 1.16 per cent.
Performance of funds since December 2012
Source: FE Analytics
Mito noted that markets should not be affected by the election noting that the case for investment remained strong.
“From a bottom-up perspective, earnings revisions in Japan stand out compared to other developed markets reflecting the sound global recovery and corporate efforts on margin improvement,” she wrote. “Furthermore, external demand, domestic production, consumption and public spending are currently all supportive.”
The £489.3m CF Morant Wright Nippon Yield fund aims to deliver absolute returns by investing in undervalued Japanese companies with strong balance sheets, sound business franchises and attractive dividend yields.
In its most recent factsheet, the managers noted that the Topix had hit the highest level for two years while economic data had remained strong.
The fund had second highest maximum drawdown figure 9.46 per cent but was the most highly correlated of the five funds to the Topix benchmark with an r-squared figure of 0.29. The fund has an OCF of 1.19 per cent.