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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
01 September 2017

Summary

  • Since his election as Prime Minister in 2012, Shinzō Abe has introduced a number of policies which aim to stimulate economic growth in Japan. A huge quantitative easing programme, for example, injects money into the financial system and the rest of the economy with the intention of boosting wages and increasing consumer spending, which could lead to rising inflation.
  • Negative interest rates were also introduced at the start of 2016 to help kick-start growth. This effectively means Japanese banks are charged a fee to deposit cash with the central bank and encourages them to put their money to more productive use by lending to households and businesses, which could also increase domestic spending and investment.
  • 2015 saw the introduction of Japan’s Corporate Governance Code, which ensures shareholders are at the centre of corporate decisions. The changes are aimed at increasing the accountability of management and ensuring resources are deployed more effectively, including achieving an appropriate balance between reinvesting capital for growth and paying dividends. Ultimately, for the companies that demonstrate an ability to improve, their share prices should rise, though nothing is guaranteed.
  • The Japanese stock market reacted negatively to Donald Trump’s election as US President in November 2016, but recovered strongly and returned 22.5%* over the year to the end of August 2017. The Japanese Yen weakened against Sterling over the year and the market returned 17.0%* for UK-based investors, although this should not be seen as a guide to the future.

Source: *Lipper IM to 31 August 2017

Our view

Japan is the world’s third largest economy and famed for its excellence in technological innovation. However, after years of sluggish economic growth many investors have overlooked Japan as an investment destination.

Since the election of Prime Minister Shinzō Abe in 2012, various policies have been introduced with the aim to stimulate economic growth. There is some evidence that the Corporate Governance Code has already strengthened shareholder returns but the full effects of the new policy will become clear in the years ahead.

Japan continues to face challenges, however, so periods of stock market volatility should be expected. The country is contending with large piles of debt, while an ageing population means there is an increasing number of people requiring care, but a smaller workforce to support this.

If successful, the full benefits of Abe’s improvements should be felt over years, not months. In the meantime, we view Japan as one of the most undervalued major global stock markets, which means shares are generally priced below their longer-term growth prospects, and remain positive on the long-term prospects for investors. There are a handful of fund managers that we believe have the talent to outperform the broader Japanese market over the long term, and our favourites feature on our 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 endured nearly two decades of deflation and poor economic growth after its economic bubble burst in the early 1990s. In recent years Prime Minister Shinzō Abe has attempted to give the economy a new lease of life by introducing a number of policies, such as quantitative easing and negative interest rates, designed to stimulate economic growth. Since Shinzō Abe gained power almost five years ago, the Japanese stock market, as measured by the FTSE Japan Index, has increased 109.1%* (in sterling terms). Please note that past performance is not a guide to future returns.

The Japanese economy has continuously expanded for the past 18 months and this has reflected positively on the share prices of companies whose fortunes are tied to the health of the Japanese economy. Companies in the oil & gas, industrials and technology sectors, for example, were some of the strongest performers, which benefited funds with a bias to these areas. Smaller companies also outperformed their larger counterparts, given their greater sensitivity to Japan’s economic prospects. The weakest sectors over the period were those that typically have consistent earnings streams and deliver relatively stable performance regardless of the economic environment. This includes companies in the healthcare and utilities sectors.

*Source: Lipper IM to 31/08/2017

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 TR

    +110.3

  • FTSE Japan

    +112.1%

Data correct as at 31/08/17. Please remember past performance is not a guide to future returns.

Fund reviews

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest 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 are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at August 2017. 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 in the Vantage Service with 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

The manager aims to identify companies that have a competitive advantage and good growth prospects that have not been recognised by other investors.

Dan Carter, the fund’s manager, is relatively new to the fund and took over from well-regarded predecessor Simon Somerville in June 2016. While the two managers adopt a similar approach, the portfolio has underperformed the broader Japanese stock market under Dan Carter’s short tenure, with some of the fund’s large, high-yielding businesses detracting from returns. The manager’s stock selection has also hampered performance, according to our analysis. The fund does not currently feature on the Wealth 150 list of our favoured funds.

Scott McGlashan and Ruth Nash seek undervalued companies with strong balance sheets that may have been overlooked by other investors. The fund has a bias to higher risk small and medium-sized companies.

The fund has outperformed the wider Japanese stock market over the past year. A bias towards lowly-valued smaller companies in more economically-sensitive areas of the market boosted performance towards the end of 2016, although the fund has surrendered part of its outperformance so far this year. The fund currently has a bias to the industrials sector and stock selection in this area has been particularly strong, according to our analysis. Scott McGlashan and Ruth Nash are experienced investors and we believe 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 and 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 Document which contains further details.

The fund invests in what the manager believes to be sound but out of favour businesses, which are capable of a turnaround. The portfolio tends to remain concentrated, which increases risk.

The fund is biased towards larger companies which underperformed their smaller counterparts over the past year. Even so, the fund outperformed the FTSE Japan partly due to the manager’s strong stock selection. Given the manager’s focus on out-of-favour companies we would expect the fund to experience shorter-term periods of underperformance versus its benchmark. However, we view Stephen Harker as one of the industry’s most knowledgeable and experienced investors in Japanese companies and his tried-and-tested approach has historically proved fruitful for long-term investors, although this is not a guide to the future.

Andrew Rose runs this fund in a relatively conservative manner and invests in companies of all sizes, including higher-risk smaller companies, across a diverse range of sectors.

Andrew Rose seeks companies poised to benefit from Japan’s economic strengths, such as the manufacturing industry. The fund is currently biased towards the industrials sector where stock selection has been particularly strong over the longer term, according to our analysis. The fund has performed similarly to the broader Japanese stock market over the past year, although it has delivered good outperformance of its benchmark over a longer time horizon. We retain our conviction in the manager and his disciplined investment process.

This fund aims to match the performance of the FTSE Japan Index, a broad index of over 490 companies.

This fund is fully replicated, meaning it invests in every stock in the FTSE Japan Index. We view this as a good option for low cost and 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 extremely well since the end of 2014, which means it has outperformed the broader Japanese market since Michael Lindsell took over management in 2004. Past performance should not be seen as a guide to future returns. Our analysis shows the manager’s style of investing in large, stable companies has added value for investors over the long term, alongside some good stock selection. That said, we would prefer to see a more consistent track record of stock selection 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.

Latest research updates

The Japanese stock market was one of the first to feel the effect of Donald Trump’s victory in the US presidential race. At its close (6am UK time on the 9th November), it was evident Hillary Clinton had lost her battle, and their market fell almost 5%. As with most shock reactions, the market recovered much of its initial fall over the following few days, although it still sits below its pre-election level.

In our view, investors should pay little attention to short-term market movements and leave decisions over how to react to skilled and experienced fund managers. One of our favoured managers in this region is Stephen Harker of the Man GLG Japan CoreAlpha Fund.

His fund is focused on large, undervalued companies and until July 2016 had experienced five years of relatively lacklustre performance. Value strategies worldwide have struggled over the past few years as investors have favoured the relative safety of growth . However, this phenomenon has shown signs of reversal in recent months, with Trump’s victory adding momentum. This, coupled with a fall in sterling and strengthening yen, has helped the fund enjoy one of its strongest periods of performance in its eleven year history, although past performance is not a guide to the future.

According to Stephen Harker, the health of the Japanese stock market is largely driven by macroeconomic events. A fall in oil and commodity prices, for example, is the main contributor to Japan’s recent strength verses the UK, as it imports both in huge quantities. The difficulty in predicting the direction of a stock market based on factors outside of his control is part of what drives the manager and his team to disregard the wider picture and focus on individual companies.

They employ a strategy of ‘bottom fishing’ to uncover opportunities among businesses other investors have discarded. They religiously recycle profits from investments that have performed well into companies yet to be recognised by the wider market, thereby ensuring a constant rotation into tomorrow’s potential winners. Automobiles, steel, banks, mining and real estate are all areas in which they are currently finding value. Toyota, Mitsubishi UFJ Financial, and Nippon Steel Sumitomo Metal are all significant holdings in the fund. The fund is relatively concentrated with around 50 holdings which means each can have a greater impact on returns, but is a higher-risk approach

Real estate companies have only recently been represented in the portfolio. The sector has historically been highly overvalued – at one point, the Tokyo Imperial Palace was valued higher than all the real estate in California – so has not appeared on the manager’s radar. However, share prices of real estate companies have fallen over the past three and a half years and Stephen Harker now feels there are pockets of opportunity to be found.

The fund’s price-to-book ratio is currently at an extreme discount relative to the market, implying he owns some of the most highly undervalued companies in Japan. The fund is therefore well positioned should undervalued companies continue to become more popular with investors.

We believe a well-balanced and diversified portfolio is the best route to good long term returns. A variety of investment strategies is also important to ensure the portfolio doesn’t all move in one direction. As growth investing has been so popular in recent years, we suspect most investors are biased that way, with little exposure to value strategies. We therefore feel this fund is a worthy addition to almost any portfolio and it remains on the Wealth 150+ list as one of our favourite ways to gain exposure to this undervalued market.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

  • Dan Carter took over from Simon Somerville in June 2016 and Mitesh Patel joined as assistant manager in October 2016
  • No significant changes to the investment approach or the portfolio since Dan Carter took over
  • We would like to see the managers establish a longer track record of success before considering the fund for the Wealth 150

Dan Carter took over from Simon Somerville as lead manager of Jupiter Japan Income in June 2016. He was previously the fund’s co-manager from November 2011 and has also been lead manager of Jupiter JGF Japan Select, a similar fund, since October 2013. He has 12 years’ experience analysing Japanese companies in total.

There have been no significant changes to the portfolio since he took over. He uses a similar investment approach to Simon Somerville. The aim is still to invest in companies with the ability and willingness to grow dividends at a faster pace than the average for the stock market.

To determine a company’s ability to grow dividends Dan Carter asks questions in five main areas:-

  • Financial stability – does the company have a strong balance sheet and healthy cash flow?
  • Management quality – will management act in the best interests of shareholders?
  • Competitive advantage – can the company defend its market share and margin?
  • Growth – is there an identifiable reason why profits should grow?
  • Valuation – is the valuation reasonable and is there potential for upside?

Recent investment in companies which meet the above criteria include Don Quijote, a discount retailer; Horiba, a leading maker of auto emissions testers; and Murata, a world-beating maker of communications equipment.

If a company ceases to meet the criteria above and looks to be in long-term decline it will be sold. Recent sales have included Panasonic, on fears its competitive advantage has been eroded; and Casio, which has struggled with higher costs, competition and pressure on profit margins.

Dan Carter maintains a concentrated portfolio. This means each investment can contribute significantly to performance, but it increases risk.

Our view

Events such as fund manager departures can be a good catalyst to review a portfolio. Dan Carter has a sensible approach, in our view, and he could go on to deliver good returns. However, according to our analysis, he has delivered a slightly lower return than the average fund in the sector and Japan’s Topix Index since October 2013. This incorporates his track record as lead manager of Jupiter JGF Japan Select and the short time he has been at the helm of Jupiter Japan Income, although past performance is not a guide to the future.

We prefer to invest with fund managers with long track records. In light of Dan Carter’s relatively short track record as a lead fund manager we felt it prudent to remove the fund from the Wealth 150 when he took over. The Wealth 150 is reserved for the fund managers we believe have the best prospects. We are not currently considering the fund for readmission, but we will inform investors if our views change.

Please note the fund’s charges can be taken from capital which can increase the yield, but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

  • Paul Causer and Paul Read maintain a conservative approach
  • They are finding some opportunities among financial bonds, particularly those issued by banks
  • Performance has been subdued, but we retain faith in the managers to deliver over the longer term

Our view

Two experienced fund managers and a highly flexible approach is an attractive combination, in our view.

Paul Causer and Paul Read’s more conservative approach has not paid off in recent years as bond markets have performed strongly. We have some sympathy with their view that there is little value to be found across bond markets and attractive opportunities are few and far between. We also have faith in them to pounce when better opportunities arise.

We continue to believe the managers have the potential to deliver excellent long-term performance and the fund remains on the Wealth 150+. It could be considered by investors who share the managers’ cautious outlook, but are happy with the flexible approach, which lets them make the call over when to take more risk in search of returns, and when to shelter the portfolio if they see tough times ahead.

Outlook

The economic environment for the year ahead looks relatively benign, according to Paul Causer and Paul Read. Economic growth is relatively robust, which should support the ability of companies to pay their debts; and inflation is manageable.

However, because this environment – low interest rates, low inflation, and moderate economic growth – has persisted for so long, bond yields have been driven ever-lower and prices ever higher. This means there is currently very little reward on offer, in the form of yield, for taking the risk of lending money to companies and governments.

For these reasons Paul Causer and Paul Read retain a relatively cautious stance. They believe better opportunities will present themselves if they remain patient. Their primary aim at the moment is to offer some shelter should bond markets go through a difficult period. They also want the flexibility to pounce on opportunities thrown up by any sell-off.

Fund positioning

Around half the fund is invested in government bonds, short-term bonds, and a little cash. Government bonds are deemed to be relatively safe, because there is less chance of a country going bust than a company. Countries such as the UK and US can also print money to repay bond holders, reducing the chance of investors not getting their money back. This ‘safe haven’ status means they often offer some relative shelter when bond markets fall.

The size of the government bond market also means it is relatively quick and easy to buy and sell. So, by holding these bonds there is the potential for some shelter from bond market falls and the opportunity to pounce on better opportunities when they arise. The short-term bonds and cash fulfil a similar role.

One area where opportunities are to be found, according to Paul Causer and Paul Read, is among bonds issued by financial companies. They view banks as getting stronger, with better finances and more robust regulation than a few years ago. Bonds issues by Barclays, RBS, BNP Paribas and HSBC all feature in the portfolio and financial bonds account for almost 30% of the fund overall.

Performance

The managers’ more conservative stance has seen the fund lag modestly behind the IA £ Strategic Bond sector average in recent years. While this is disappointing we believe they have the potential to deliver good long-term returns and the fund still has a place as part of a diversified bond portfolio. The flexible approach does mean the managers can invest in higher risk areas, such as high yield bonds and emerging market debt, and use higher risk instruments such as derivatives.

Invesco Perpetual Tactical Bond - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2017

Annual Percentage Growth
May 12 -
May 13
May 13 -
May 14
May 14 -
May 15
May 15 -
May 16
May 16 -
May 17
Invesco Perpetual Tactical Bond 16.4 4.6 1.7 0.7 3.4
IA £ Strategic Bond 11.2 4 4.3 0.1 8

Source: Lipper IM to 31/05/2017

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

  • Paul Chesson seeks undervalued areas of the Japanese stock market with attractive growth prospects
  • The fund has added value over the long term, although it is more volatile than its peers
  • We remain confident in the ability of Paul Chesson to deliver good long-term returns

Japan is undergoing considerable change. Shinzo Abe’s election as Prime Minister in 2012 saw the introduction of significant reform to boost economic growth. In 2015, the adoption of a new Corporate Governance Code by Japanese companies should force them to put shareholders at the forefront of everything they do. However, challenges persist as Japan remains burdened with a record level of debt and an ageing population.

Paul Chesson is prepared to make changes to his Invesco Perpetual Japan Fund in response to both Japan’s emerging threats and opportunities. Given Japan’s exposure to the global economy, he is mindful that the country’s stock market will not be immune from wider economic shocks. That said, he is positive in his outlook for the market in the near term.

The manager focuses on areas of the market he believes offer good value. He currently believes some of the more economically-sensitive sectors are undervalued compared with the growth prospects they offer. Recent purchases centre on the banking, real estate, metals and industrials sectors. Elsewhere, exposure to less economically-sensitive areas of the market that he believes are overvalued, such as the tobacco and pharmaceuticals sectors, has been reduced.

Performance

The fund outperformed the Topix Index in 2016, although it lagged the index earlier in the year due to its exposure to electric power companies that operate nuclear power plants. The sector was rocked by delays in the reopening of the country’s nuclear power plants, which were idled following the 2011 Fukushima disaster. Paul Chesson has maintained the fund’s exposure as he remains confident the Japanese government will remain committed to its nuclear energy policies. An investment in Japan Airlines also suffered losses early in the year largely due to rising concerns over terrorist attacks, although its share price has improved in recent months.

Positive contributors to performance include Seria, a discount retailer whose share price was boosted by strong earnings growth and good profitability. Exposure to the real estate sector also paid off in an environment of improving rents and low funding costs.

The fund’s longer-term performance is encouraging. An investment of £10,000 in the fund five years ago would now be worth £20,350, while the Topix Index would have produced a return of just over £19,100, although past performance is no guide to future returns. The manager’s high-conviction approach and the concentrated nature of the fund means it's performance has been significantly more volatile than the index and therefore we feel this fund should only be considered by those with a long-term investment horizon. In addition, the fund manager is able to use derivatives which can increase risk. Please note that investments can go up and down in value, and you could get back less than you invest.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Invesco Perpetual Japan 11.4 31 -3.1 15 25.1
Topix TR 2.8 24.7 2.7 18.2 23.4

Past performance is not a guide to the future. Source: Lipper IM to 30/12/2016

Our view

Paul Chesson is an experienced and capable fund manager. He blends together what he believes to be his best ideas to form this high-octane fund. Our analysis shows that his investments in higher-risk small and medium-sized companies, as well as positioning the fund towards some of the better-performing sectors, has added value over the longer term. The fund remains one of our favourite ways to access the Japanese market and it retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

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

The fund is managed by Paul Chesson, an experienced fund manager with a 20 year track record of investing in Japan. While the manager has outperformed the Japanese stock market over a long period of time, performance has been volatile. He has delivered some strong performance over short periods, such as in 2009, but this has often been followed with longer periods of more lacklustre performance against the stock market.

This is demonstrated in the chart below – when the line is rising the fund is outperforming the FTSE Japan Index, and when it is falling it is underperforming. Furthermore, we feel the manager’s stock selection– a key factor we analyse when assessing a fund manager’s ability – has been variable and added little value in recent years.

Find out more about Paul Chesson’s investment approach

Paul Chesson's track record against the FTSE Japan Index

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2017

The chart initially shows Paul Chesson’s performance managing Invesco Japanese Equity Core, followed by his time running Invesco Perpetual Japan from February 2000.

Annual Percentage Growth
July 12 -
July 13
July 13 -
July 14
July 14 -
July 15
July 15 -
July 16
July 16 -
July 17
Invesco Perpetual Japan 43.9 -1.2 16.8 11.2 15.4
FTSE Japan 30.2 -0.6 18.3 14.1 16.1
IA Japan 30.7 -1.5 16.4 14.3 17.5

Past performance is not a guide to future returns. Source Lipper IM to 31/07/2017.

Overall, we do not feel investors have been sufficiently compensated for the risks taken. The Wealth 150 is reserved for managers in which we have the highest conviction. In our view, there are other talented fund managers in the Japan sector who have demonstrated more consistent performance and a greater ability to add value through their stock-picking over a prolonged period. Furthermore, investors are able to access these managers at a lower ongoing fund charge, which can make a real difference to performance over the long term. Our favourites feature on the Wealth 150+.

Find out more about this fund

Please read the key features/key investor information document in addition to the information above.

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

We view Merchants Trust as a good choice for investors primarily seeking a higher, regular income from their investments. Simon Gergel, the trust’s manager, also aims to provide some capital growth, but the trust is predominantly focused on companies offering an above-average yield in order to provide a higher income.

The manager also has the flexibility to use income-enhancing techniques as well as gearing to boost its dividend payments, although both these strategies increase risk. At present the trust yields an attractive 5.0%, although please remember this is not an indicator of future income. Gearing (borrowing to invest) currently stands at 19%.

It is encouraging to see the trust outperform the broader UK market over the past year following a tougher period of performance. That said, we would like to see more evidence of strong stock-picking ability over a prolonged period. The trust also currently faces a headwind from part of its gearing structure, where an expensive tranche of debt carries a high interest rate. This will reach maturity in January 2018 and could benefit performance from this point, although there are no guarantees.

Annual Percentage Growth
Sep 12 -
Sep 13
Sep 13 -
Sep 14
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Merchants Trust PLC 39.4 3.9 -8.3 7.4 19.9
FTSE All-Share 18.9 6.1 -2.3 16.8 11.9

Past performance is not a guide to future returns. Source: Lipper IM 30/09/17

Portfolio review

Simon Gergel is positive in his outlook for the income that can be generated from the UK stock market. Not long ago many investors were concerned over the vulnerability of dividend payments from some sectors, including oil and mining, where companies suffered from years of mismanagement and poor capital allocation.

The manager feels these concerns were unfounded in many cases. Some companies in these sectors are seeing a resurgence in cash flows and dividends and he has therefore maintained large investments in companies such as Royal Dutch Shell, BP and BHP Billiton.

These investments help to form the trust’s core of larger, well-financed companies with strong brands, which are supported by attractive dividend yields. Other companies that fulfil these characteristics include HSBC and pharmaceutical giant GlaxoSmithKline. Please note the manager also invests in small and medium-sized companies, which are higher risk.

Simon Gergel’s overall investment style is contrarian in nature, which means he seeks companies he believes to be undervalued and that are often undergoing a recovery. Most recently he added investments such as Bovis Homes to the portfolio. Following a period of depressed profit growth, new management were recruited this year in an attempt to turn around the company’s fortunes. The manager is also encouraged by the company’s attractive land bank and believes it could benefit from the UK’s housing shortage. Poor sentiment towards the business also provided the manager an opportunity to purchase shares at an attractive valuation and lower price.

Elsewhere, the trust has little exposure to the consumer staples sector. In recent years many investors have favoured the relatively stable earnings and dividends that a lot of these businesses generate. However, this has left their share prices and valuations at elevated levels.

One company the manager is happy to own in this sector is beverage company Diageo. He is more optimistic about this company’s prospects than others in the sector on account of its good cash flows, which could support future dividends; lower levels of debt; and greater pricing power, which means the company has some flexibility to increase prices without affecting demand for its products.

Please remember all investments fall in value as well as rise so investors could make a loss. Potential investors should refer to the latest annual report and accounts for details of these risks along with the charging structure. A proportion of the trust’s charges are taken from capital, which can increase the yield but erodes the potential for capital growth.

View Merchant Trust factsheet

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

  • NAV total return of 27.6% compared with 18.8% for the trust’s benchmark
  • Share price total return of 37.5%
  • Sarah Whitley will retire from Baillie Gifford and step down as manager on 30 April 2018
  • Matthew Brett will take over as lead manager, supported by Praveen Kumar as deputy manager

Sarah Whitley will step down as manager of the Baillie Gifford Japan Trust on 30 April 2018. At this point, Matthew Brett will assume responsibility for the trust with support from Praveen Kumar and the wider investment team at Baillie Gifford.

Sarah Whitley has managed the trust since 1991 and over this time has delivered strong returns for investors. She has built an enviable track record within her peer group through an unconstrained, but well-defined, investment approach. The flexible use of gearing (borrowing to invest) and investments in small and medium-sized companies has added value over the long term, although it does make the trust higher risk.

Seeing the trust lose an experienced manager, and the team a valuable member, is disappointing. That said, Matthew Brett has worked closely with Sarah Whitley for many years since joining Baillie Gifford and the Japanese Equities team in 2003. He has also attended all Japan Trust Board meetings and co-managed the Baillie Gifford Japanese Fund alongside Sarah Whitley since 2008. We therefore feel the trust will be in good hands following the transition, and are encouraged the same long-standing investment approach will be maintained.

Potential investors should refer to the latest annual report & accounts for details of the risks and charging structure. Remember all investments fall in value as well as rise so investors could get back less than they invest.

Annual Percentage Growth
Sep 12 -
Sep 13
Sep 13 -
Sep 14
Sep 14 -
Sep 15
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Baillie Gifford Japan Trust 81.9 2.4 13.0 31.3 34.0

Past performance is not a guide to future returns. Source: Lipper IM to 30/09/17

What helped performance?

The trust delivered an exceptional return over the year and outperformed its benchmark by 8.8% (in NAV terms). The manager’s stock-picking boosted performance and good returns came from a diverse range of companies, including manufacturers, internet businesses, financials and service companies. Manufacturer Yaskawa Electric was the best-performing stock over the period.

The healthcare sector has an increasing number of investment opportunities, according to the manager. Investments in three new companies, including Cyberdyne, Peptidream, and Healios were added to the portfolio. Sarah Whitley also favours automation-related companies and initiated new positions in Keyence and Monotaro.

Investment outlook

Japan has made major corporate governance improvements in recent years and many companies have been paying more attention to improving shareholder returns. Dividends have continued to grow, for example, and the trust has seen the benefits of this change. Sarah Whitley and her team continue to believe many of the companies they invest in have the ability to grow dividends over the long-term.

Japan has also recently enjoyed its longest streak of economic growth in over a decade, helped by rising domestic consumption and businesses reinvesting their profits for future growth. The country’s unemployment rate also remains low and, with fewer people fighting for the same job, this could put pressure on wages to grow and lead to more consumer spending. Overseas demand for Japan’s expertise in areas such as robotics has also strengthened.

That said, the manager is mindful of potential challenges. Any slowdown in the global economy could reduce demand for Japanese exports, as would any trade disputes between the US and China (two of Japan’s most significant export markets). Geopolitical tensions, such as those caused by North Korea, could also be a concern.

Sarah Whitley believes there are businesses able to thrive, regardless of wider economic conditions, for those prepared to look. Rapid development is taking place in areas such as the internet, automation, and healthcare, and this gives the opportunity for dynamic businesses to prosper.

View the Baillie Gifford Japan Trust factsheet

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  • With bonds yields continuing to fall, attractive opportunities are harder to come by, according to Paul Causer and Michael Matthews
  • They are finding some opportunities among financial bonds, particularly those issued by banks
  • Performance has been subdued over the past couple of years, but the long-term record is good and we retain faith in the managers

Our view

We rate the managers of this fund highly. Their more conservative approach has not paid off over the past two to three years as bond markets have continued to perform well on the whole. We have some sympathy with their view that the risks in some areas of the bond market outweigh the rewards, and attractive opportunities are few and far between.

Even the best fund managers go through periods of lacklustre performance. We believe Paul Causer and Michael Matthews have the ability to deliver excellent long-term returns and their long-term track record remains impressive. They are willing to take a flexible approach and invest the fund differently to their peers. At times this could cause performance to deviate from the sector average and result in a higher risk portfolio.

For investors comfortable with this approach we continue to believe this is a good fund to consider for exposure to corporate bonds. It remains on the Wealth 150 list of our favourite funds across the major sectors.

Performance Review

The weaker spell of performance over the past three years has partly been caused by the fund’s ‘duration’ being kept relatively short. This affords some shelter against rising interest rates because the prices of short-duration bonds have not fallen to the same extent as long-duration bonds when interest rates rise, or are expected to rise. In recent years interest rates have stayed lower for longer than expected. Long-dated bonds have therefore delivered strong returns and it has been the wrong call to be short-duration.

Even though performance has been subdued relative to peers the fund has still delivered positive returns. The long-term track record is also good and over the past five years the fund has delivered growth of 36.8% compared with 34.8% for the IA £ Corporate Bond sector average* although please remember that past performance is not a guide to the future.

Invesco Perpetual Corporate Bond - performance over five years

Past performance is not a guide to the future. Source: Lipper IM* to 31/05/2017

Annual Percentage Growth
May 12 -
May 13
May 13 -
May 14
May 14 -
May 15
May 15 -
May 16
May 16 -
May 17
Invesco Perpetual Corporate Bond 17.8 4.2 3.5 1.1 6.4
IA £ Corporate Bond 11.7 2 6.6 1.5 9.3

Source: Lipper IM to 31/05/2017

Fund positioning

Financial bonds, particularly those issued by banks, are the managers’ preferred area of opportunity. Over a quarter of the fund is invested in this area, including in bonds issued by Lloyds and Barclays. They view banks as getting stronger, with better finances and more robust regulation than a few years ago. It is also still possible to find relatively attractive yields in this area, according to the managers.

Elsewhere, opportunities have been found among bonds issued by telecoms and utilities companies. The managers have also invested in some bonds issued by US companies, where it is possible to find higher yields than those available on similar bonds in the UK and Europe.

In anticipation of better opportunities being available at a later date, some of the fund is also invested in cash and bonds that can be sold quickly and easily, such as government bonds. This could afford the fund some relative protection should bond markets go through a tough time, and allow the managers to pounce on opportunities thrown up as a result. Investors should note the managers have the flexibility to invest in high-yield bonds and use derivatives, which adds risk.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

  • Andrew Rose seeks undervalued Japanese companies with good long-term growth prospects
  • Our analysis suggests his stock picking has boosted recent performance
  • The fund remains one of our favourite ways to gain exposure to the Japanese stock market

Japan encountered years of sluggish growth after its economic bubble burst in the early 1990s. Many investors have since overlooked Japan as an investment opportunity. However, the introduction of a number of policies designed to kick-start its ailing economy could prove positive over the long term. The country has also recently adopted a Corporate Governance Code, which aims to ensure investors are at the centre of company decisions and could bode well for shareholder returns.

Andrew Rose, manager of the Schroder Tokyo Fund, seeks companies he believes will benefit from Japan’s improving, longer-term economic strengths. He aims to invest in undervalued companies whose longer-term growth potential is overlooked by other investors.

The fund's performance

Andrew Rose takes a relatively conservative approach to investing in what can be a volatile market. He achieves this partly by investing in companies of all sizes across a variety of different sectors. This means the fund’s performance does not tend to deviate significantly from the benchmark over the shorter term, but significant outperformance has been achieved over the longer term. Over the past 10 years, the fund has grown 97.5%* while the Topix index has returned 78.2%, although please remember past performance is not a guide to future returns.

The fund outperformed its benchmark in 2016, but struggled earlier in the year due to a lack of exposure to better-performing defensive areas of the market, such as the food and utilities sectors, which Andrew Rose viewed as overvalued. Instead, he favours undervalued areas of the market, such as banks and insurance companies, which served the fund well in the latter half of 2016 and boosted performance.

The fund’s performance was also helped by an investment in technology company Nintendo who own a stake in The Pokémon Company. Their share price rose sharply following the release of the popular Pokémon Go game.

Andrew Rose remains positive on the outlook for the Japanese stock market. He is encouraged by an improvement in profits from some domestically-focussed small and medium-sized companies, which are higher risk than their larger counterparts, and believes the recent weakness in the Japanese Yen should help larger exporters, as a weaker currency makes these companies’ goods cheaper for overseas buyers. In his opinion, these trends, together with the higher oil price, could help curb the deflation that currently hinders the wider Japanese economy.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Schroder Tokyo 3.5 23.4 3.2 15.5 26.3
Topix TR 2.8 24.7 2.7 18.2 23.4

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2016

Our view

Our analysis shows that Andrew Rose’s stock selection and a bias towards smaller and medium-sized companies has added value for investors over the long term. His conservative approach also means the fund has tended to be less volatile than its peers, though all investments can fall as well as rise in value so investors could make a loss. We retain faith in the manager to outperform over the long term and the fund remains one of our favourite ways to gain exposure to Japan. We feel it is deserving of its place on the Wealth 150+ list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

  • Large, high-quality Japanese companies have rarely looked so attractively-valued according to the manager
  • The manager’s ‘value’ style of investing combined with good stock selection and weaker sterling boosted returns over the past year
  • The fund remains one of our favourite ways to access Japan’s stock market

Our view

Stephen Harker is a contrarian investor. He seeks companies that have fallen out of favour with investors but are capable of staging a turnaround. The manager has demonstrated this to be an effective way of investing over the long term, although it can lead to shorter-term periods of underperformance and past performance should not be seen as a guide to future returns.

The fund is a concentrated portfolio of the manager’s highest-conviction ideas and currently comprises 44 stocks. We like this approach as it means each investment can contribute meaningfully to returns, although this is a higher risk strategy.

Stephen Harker has a long career investing in Japanese equities and has shown an impressive ability to add value through stock selection, according to our analysis. Japanese shares currently look good value and this fund remains one of our favourite ways to gain exposure to the country. The fund retains its place on the Wealth 150+ list of our favourite funds across the major sectors.

When in a hole, keep digging and trim when you’re winning.”


Stephen Harker aims to invest in unfashionable companies when their share prices are at a low point. He assesses whether a turnaround is possible and patiently waits for their potential to be recognised by other investors. He gradually takes profits once the share price recovers, before finally selling the investment and investing in the next undervalued investment opportunity.

The manager concentrates his search at the larger end of the Japanese stock market and the type of large, high-quality companies he seeks have rarely been so lowly valued, in his view. The electric power & gas, banking and steel sectors currently offer significant value and Stephen Harker has increased exposure to these areas as a result. In contrast, he has taken profits from investments in life insurance companies, which have performed well and now offer less value.

Performance

The fund has delivered outstanding long-term performance, returning 139.6%* over Stephen Harker’s tenure since January 2006. The IA Japan sector returned 49.7%* over the same period, although this is not a guide to the future.

Annual Percentage Growth
May 12 -
May 13
May 13 -
May 14
May 14 -
May 15
May 15 -
May 16
May 16 -
May 17
Man GLG Japan CoreAlpha 37.7 1.3 32.6 -11.8 40.9
IA Japan 29.5 -3.4 26.4 -2.5 31.7

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2017

Stephen Harker’s value-style of investing and a focus on more economically-sensitive areas of the market, such as financials, proved a headwind to performance throughout 2015 and the first half of last year. A reversal of this trend in the latter half of 2016 has proved beneficial to performance over the past year. Weaker sterling against the Japanese Yen also boosted returns for UK-based investors.

The manager’s stock selection also added value, with auto manufacturer Mitsubishi Motors and financial services group Nomura Holdings both providing solid returns. In keeping with the fund’s investment process, profits were gradually taken from these investments as their share prices rebounded.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

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.

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