Invesco Perpetual Japan Accumulation Shares

Aggressive stimulus measures designed to tackle Japan's long-running deflationary problems, including a doubling of its Quantitative Easing (QE) programme to 7 trillion yen (£46bn) each month, have been well received by investors. The stock market has rallied strongly, particularly economically sensitive areas, to which the Invesco Perpetual Japan Fund is heavily exposed. This has helped spark a turnaround in the fund's fortunes over the last six months, after a period of underperformance between the middle of 2010 and mid-2012.

The fund's recent performance has been driven by a healthy weighting to financials such as banks, brokers and real estate, which have benefitted from increased investor risk appetite. Holdings in Brokers Nomura Holdings and Daiwa Securities have been particular bright spots, reflecting the sensitivity of their earnings to rising stock markets and trading volumes. Exposure to Japanese exporters such as steel manufacturer JFE Holdings and semiconductor wafer manufacturer Sumco has also been beneficial, as the yen has weakened. A weak yen makes the exports of Japanese companies cheaper for foreign buyers and has helped drive share price gains.

That said, not everything has worked in the fund's favour. Significant exposure to the technology sector has detracted from recent performance. The fund's manager, Paul Chesson, believes valuations in the sector remain highly attractive and has recycled profits from financials into selected technology stocks, to take advantage of share price falls.

Despite the strong recent rally, Paul Chesson remains bullish in his outlook for the Japanese stock market, and believes valuations remain attractive. He notes that the Japanese economy grew by 2% in real terms in 2012, which compares favourably with many other developed economies. Looking forward, he believes the Japanese economy can continue to achieve similar levels of expansion this year. He also expects the yen to remain weak which should provide a further boost to exporters. As a result the fund continues to be biased towards economically sensitive areas such as financials, technology, shipping, and manufacturers of autos and electrical appliances, where valuations reflect a slower earnings recovery than Paul Chesson expects.

The aggressive positioning of this fund means it is likely to be volatile, and will inevitably undergo periods of underperformance. The current bias towards economically sensitive areas means it is likely to struggle in falling markets, as we saw in 2011, but could perform strongly when risk appetite increases, as we have seen recently. Paul Chesson is an experienced and capable fund manager, having successfully run Japanese investments at Invesco Perpetual since 1997. For long-term investors, willing to ride out the inevitable ups and downs, we believe he has the ability to deliver attractive returns. The fund remains on our Wealth 150 list of favourite funds across the major sectors.