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North America sector

Japan sector

Funds investing primarily in the shares of Japanese companies. Most funds in the sector aim to produce capital growth, rather than income.

Dominic Rowles - Investment Analyst
11 June 2018

Summary

Japan is home to some of the best-known businesses on the planet. Toyota, Honda, Panasonic, and Nintendo to name a few. But there are also lesser-known businesses with the potential to be the household names of tomorrow.

Japan's economic bubble burst in the early 1990s. This was followed by years of sluggish growth and put many people off investing in the country.

This changed after Shinzo Abe was elected Prime Minister in 2012. He introduced a number of policies to stimulate economic growth and created more interest in Japan's markets.

We think Japanese funds could be used to diversify a global portfolio focused on long-term growth. There are a handful of fund managers we believe have the potential to outperform the broader Japanese market over the long term, each with different approaches.

Some invest in companies that have generated high levels of cash and expect steadier rates of growth. Others look for attractively valued businesses which have been through a tough time, but with the potential to recover. Some focus on larger businesses, while others prefer the higher-growth prospects, but added risk, of smaller companies.

Our view

Japan is the world’s third largest economy. It’s full of world-leading companies famed for their quality and reliability.

Prime Minister Shinzo Abe has aimed to boost economic growth and increase Japan's competitive position in recent years. A huge quantitative easing programme, for instance, injects money into the economy to help boost wages and consumer spending.

The nation is also becoming more investor friendly. A Corporate Governance Code ensures shareholders are at the centre of corporate decisions and makes management more accountable. This has the potential to strengthen returns over the long term.

The country continues to face challenges though, so periods of stock market volatility should be expected. Japan has large piles of debt. And its ageing population means an increasing number of people require care, but there is a smaller workforce to support this.

We still think Japan is a great investment opportunity, but it remains off the radar for many investors. As a result, the Japanese stock market looks attractively valued, according to our analysis.

Over the long term we believe company earnings drive share prices. But in Japan corporate earnings are rising faster than share prices. This could be an indication of growth potential, although of course there are no guarantees.

There are a number of fund managers aiming to make the most of the opportunities available in Japan. Our favourites feature on the Wealth 150+.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Performance

Japan went through nearly two decades of poor economic growth after its economic bubble burst in the early 1990s. In recent years Prime Minister Shinzo Abe has attempted to give the economy a new lease of life by introducing policies designed to kick-start growth.

Since he gained power in September 2012, the Japanese stock market, as measured by the FTSE Japan Index, has increased 126.4%* (in sterling terms). The shares of Japanese smaller companies did even better which benefited funds with a bias towards this area of the market, although this should not be seen as a guide to future performance.

Donald Trump’s threats to introduce more tariffs against China caused volatility in Asian markets over the past year. Despite this, the Japanese stock market rose 13.3%*. The yen weakened against sterling and the market returned 11.9%* for UK-based investors, although this should not be seen as a guide to the future.

High-quality companies, which some investors perceive to be more secure, remained in vogue. These companies often pay attractive dividends which further propelled their popularity in a world of low interest rates. Their share prices benefited, as did funds with a bias to these companies. Businesses that have fallen upon hard times, but where there is scope for a transformation in fortunes, also made money, but underperformed their higher-quality counterparts.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA Japan

    +76.4%

  • FTSE Japan

    +77.0%

*Data correct as at 31/05/18. Please remember past performance is not a guide to future returns.

Fund reviews

We conduct a comprehensive review of every sector. Here we provide comments on a selection of funds following our most recent Japan sector review. They are provided for your interest but are not a guide to how you should invest. If you don’t know if an investment is suitable for your circumstances seek personal advice. Comments are correct as at 31 May 2018. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Wealth 150 Fund reviews

Other funds in this sector

Here we look at some other funds of interest following our most recent sector reviews. Please note the review period may be over a short time period and past performance is not a guide to future returns.

To view a full list of our favourite funds within the sector, visit the Wealth 150

Source for performance figures: Financial Express

Paul Chesson analyses the wider economic environment and this helps him identify areas of the market that could perform well. He invests in relatively few companies, meaning each one can contribute significantly to returns, although this is a higher-risk approach.

Paul Chesson is an experienced fund manager – he has been investing in Japan for more than two decades. His fund has performed better than the Japanese stock market over a long period of time but it’s been a bumpy ride. Short periods of strong performance have often been followed by longer periods of more lacklustre performance.

The fund underperformed the Japanese stock market over the past year. We put this down to the manager’s failure to invest in companies with strong enough prospects. We think there are other talented fund managers in this sector with a more consistent track record.

The manager has the freedom to invest in derivatives which, if used, adds risk.

Scott McGlashan and Ruth Nash look for companies whose true worth is not reflected in their share prices. The fund has a bias to higher-risk small and medium-sized companies.

The fund outperformed the broader Japanese stock market over the past year. We put this down to the managers’ ability to select companies with bright futures ahead of them. Their stock picking added most value amongst companies in the financial and industrial sectors.

Scott McGlashan and Ruth Nash are experienced investors and we think their emphasis on profitable companies often overlooked by other investors will be rewarded over the long term, although there are no guarantees.

Please note the fund carries a performance fee. As it is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme. If you are considering an investment please ensure you read the fund's Key Investor Information which contains further details.

The manager invests in sound businesses out of favour with other investors but with the potential to recover. He usually holds shares in a small number of companies which increases the fund’s potential to outperform its benchmark, but is a higher-risk approach.

The fund performed well over the past year but failed to match the performance of the broader Japanese stock market. Given the manager’s focus on out-of-favour companies, we would expect the fund to occasionally underperform its benchmark over the short term. However, we think Stephen Harker is one of the industry’s most knowledgeable and experienced investors in Japanese companies. His tried-and-tested approach has proved fruitful for long-term investors, although this is not a guide to the future.

Andrew Rose runs this fund quite conservatively. He invests in companies of all sizes, including higher-risk smaller companies, across a diverse range of sectors.

The fund produced strong returns over the past year but underperformed the broader Japanese stock market. Returns were held back by a lack of exposure to the technology and automation industries which performed well. The manager currently sees little value in these areas.

Performance has been strong over the long term and our analysis shows returns have been boosted by the manager’s ability to select companies with good prospects, although past performance is not a guide to future returns. Given the manager’s more conservative approach, we wouldn't necessarily expect it to beat the return of the broader market when share prices are rising quickly. But we expect it to hold up well when markets are more subdued. We think this should help the fund perform well over the long term.

This fund aims to match the performance of the FTSE Japan Index. This is a broad index of more than 500 companies.

This fund is fully replicated, so it invests in every stock in the FTSE Japan Index. We view this as a good option for low cost, broad exposure to the Japanese stock market.

Michael Lindsell focuses his efforts on a small number of companies with unique market positions, strong brands and easily understandable business models that he believes are capable of standing the test of time. The concentrated nature of this portfolio increases risk.

The fund has performed well since the end of 2014 but performed similarly to the broad Japanese stock market prior to this. Our analysis suggests the manager has been successful in adding value through his investments in the consumer goods sector in recent years.

We’d prefer to see the manager demonstrate a more consistent track record before considering the fund for the Wealth 150 list of our favourite funds. We will continue to monitor performance and inform investors if our views change.

As it is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme. If you are considering an investment please ensure you read the fund's Key Investor Information which contains further details.

Latest research updates

JO Hambro Japan - the backdrop remains positive

JO Hambro Japan - the backdrop remains positive

Tue 29 May 2018

Scott McGlashan and Ruth Nash are two of the industry’s most experienced fund managers. In our most recent update, we look at how they have positioned their fund and share our views on its prospects.

Schroder Tokyo - seeking undervalued companies in an undervalued market

Schroder Tokyo - seeking undervalued companies in an undervalued market

Fri 09 March 2018

In this update we review the fund’s recent performance and share the manager’s outlook for Japanese companies.

Man GLG Japan CoreAlpha - selling winners and buying losers

Man GLG Japan CoreAlpha - selling winners and buying losers

Wed 17 January 2018

Stephen Harker is a contrarian investor. He seeks companies that have fallen out of favour with investors but are capable of staging a turnaround.

Invesco Perpetual Japan – Removal from the Wealth 150

Invesco Perpetual Japan – Removal from the Wealth 150

Fri 18 August 2017

The Invesco Perpetual Japan Fund has been removed from the Wealth 150 list of our favourite funds across the major sectors.

Schroder Tokyo Fund update

Schroder Tokyo Fund update

Mon 16 January 2017

Andrew Rose, manager of the Schroder Tokyo Fund, seeks companies he believes will benefit from Japan’s improving, longer-term economic strengths.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

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