Legg Mason IF Japan Equity, Lindsell Train Japanese Equity and Neptune Japan Opportunities are among several of the top-performing funds in the IA Japan sector that generated their gains by deviating significantly from the TOPIX over the past 10 years.
Many investors remain wary of the Japanese market, which has burned some in the past and has often failed to live up to its potential.
However, the election of president Shinzo Abe in 2012 and the implementation of his eponymous economic reforms dubbed ‘Abenomics’ has started to be reflected in the market.
Over the past five years the main Japanese index, the TOPIX, has risen by 154.33 per cent (in local currency terms) compared with a 100.86 per cent rise for the S&P 500 and a 50.04 per cent gain for the FTSE 100.
But that growing market optimism has not been reflected in performance of all actively managed strategies.
Indeed, the average IA Japan fund has returned just 112.30 per cent over 10 years compared with a 116.37 per cent rise for the TSE TOPIX index, the most commonly occurring benchmark in the sector.
As such FE Trustnet decided to explore the £21.6bn IA Japan sector to see which funds have outperformed with the least correlation to the index.
To find out which funds had the outperformed without relying on the TOPIX, we sought out those with bottom-quartile figures for tracking error and r-squared and top-quartile numbers for alpha generation and Sharpe ratio.
We were left with just five funds: Fidelity Japan Smaller Companies, Legg Mason IF Japan Equity, Lindsell Train Japanese Equity, Man GLG Japan Core Alpha and Neptune Japan Opportunities.
For the purposes of this study we have left out the Fidelity Japan Smaller Companies as, unlike the other funds, it is benchmarked against the Russell/Nomura Mid Small Cap Japan index and has a different strategy.
Source: FE Analytics
Below, FE Trustnet considers the remaining four funds in closer detail.
Legg Mason IF Japan Equity
Over 10 years the Legg Mason IF Japan Equity fund has been comfortably the best performer delivering a return of 407.28 per cent.
The £806.7m five FE Crown-rated fund has been managed by Shiozumi Asset Management’s Hideo Shiozumi since 1996.
Tokyo-based asset manager Shiozumi Asset Management, which is not affiliated to Legg Mason, employs a bottom-up, growth-orientated stockpicking approach. Shiozumi often favours small- and mid-caps, which has led to strong outperformance but high levels of volatility.
According to Legg Mason, the fund aims to “exploit the investment potential created by the belief that Japan is in the process of two structural changes – from a regulated to a deregulated economy and from a manufacturing to a service-orientated economy: the ‘New Japan’”.
The fund has the second lowest r-squared figure (which indicates how closely correlated a fund is to an index) to the TOPIX and the highest Sharpe ratio (which measures risk-adjusted returns).
Performance of fund vs index over 10yrs
Source: FE Analytics
The fund has 43 holdings, the top 10 representing more than half of the portfolio. Its top holding at 8.97 per cent is Nihon M&A Center, which provides merger & acquisition services to small- and mid-cap companies.
On a sector basis, 26.26 percent of the portfolio is held in healthcare companies while industrials represent a further 25.42 per cent of the fund.
The fund has an ongoing charges figure of 1.02 per cent.
Neptune Japan Opportunities
Next on the list by performance is the £282.4m Neptune Japan Opportunities fund, which has delivered a 267.16 per cent return over 10 years.
Like the Legg Mason fund, it also invests in a concentrated portfolio of 40-60 stocks. It has an active share figure of 80.22 per cent, which indicates how different a portfolio is to the benchmark.
The fund is overseen by Chris Taylor with deputy manager George Boyd-Bowman and assistant manager Strom Uru.
“Over the coming months and years, we expect the yen to gradually weaken as interest rates elsewhere begin to be consistently raised whilst those in Japan remain at current levels,” Neptune noted recently.
“Likewise, economic growth rates will show similar patterns as Japan drifts based on the lack of sustained wage growth and the country’s negative demographics.
“Given such developments are likely to trigger renewed yen weakness, the Neptune Japan Opportunities Fund’s long-held strategy of hedging the yen back into sterling will remain in place as we expect this feature will help underwrite a multi-year recovery in corporate profits.”
The fund has the largest tracking error figure (which measures the standard deviation of a fund’s excess returns over the returns of an index) of the four and the lowest Sharpe ratio.
The fund has an OCF of 0.86 per cent.
Man GLG Japan Core Alpha
The £2.1bn Man GLG Japan Core Alpha fund is team managed by Stephen Harker, Neil Edwards, Jeff Atherton and Adrian Edwards.
Performance of fund vs index over 10yrs
Source: FE Analytics
Over 10 years, the fund has returned 190.44 per cent. Currently the fund has 43 positions within the portfolio and has an active share figure of 78.76 per cent relative to the TOPIX benchmark.
“This fund has had an excellent record and we have a high opinion of the managers,” noted analysts at Square Mile Research.
“The team are not afraid to invest with conviction, often increasing the size of their positions as the stocks book value per share become cheaper. They have a value philosophy and a contrarian approach that many fund managers would struggle to follow or replicate with success.
“Given the style of investing, this fund can go through periods of feast and famine but we consider it to be a sound option for those investors seeking returns from Japan.”
The fund’s contrarian style is particularly visible amongst its sector weightings. For example, the strategy has a 14.32 per cent overweight to the banking sector relative to the benchmark.
It also has overweight positions in the iron & steel, transportation equipment and electric power & gas sectors. Underweight sector positions include in the information & communication sector, chemical and electric appliances.
The fund has an OCF of 0.90 per cent.
Lindsell Train Japanese Equity
Lastly, on a performance basis, is the five crown-rated Lindsell Train Japanese Equity fund, which has returned 163.80 per cent over 10 years.
The £169.9m fund has been managed by Michael Lindsell since 2004 and like several of the other funds in the study operates a concentrated portfolio.
Indeed, the renowned Lindsell Train investment approach involves a highly concentrated portfolio with a long-term investment horizon. As such, the manager invests in a low turnover portfolio of 20-35 Japanese stocks.
Its largest holding is consumer electronics and video game company Nintendo, which represents 10 per cent of the portfolio. This is also a long-term holding in several other funds managed by the firm, such as Lindsell Train Global Equity and the Lindsell Train Investment Trust.
Chemical and cosmetics company Kao also represents a high conviction holding within the portfolio at 9.4 per cent.
While the fund has a strong long-term track record, the fund has struggled in recent months returning just 5.9 per cent against a 10 per cent rise in the TOPIX over three months.
“October proved to be another month in which parts of the market where the fund is not represented performed best,” the manager noted.
“Low margin manufacturers and materials companies dominated the leading performer tables.
“We underperformed the index [in October] by just over 3 per cent. Fortunately, our big holdings in Nintendo and [pharmaceutical company] Astellas kept up with the market, otherwise things could have been worse.”
Performance of fund vs index over 10yrs
Source: FE Analytics
Despite more recent underperformance, however, the fund has performed strongly in 2017 returning 26.5 per cent to 31 October compared with an 18.6 per cent rise in the index.
The fund has an OCF of 0.85 per cent.