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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.

Kate Marshall - Investment Analyst
13 January 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 encourage 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 new Corporate Governance Code, which should ensure 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 was turbulent in 2016 and fell 15.9% between the start of the year and mid-February, in sterling terms. It subsequently recovered and delivered a total annual gain of 23.4%*, although this should not be viewed as a guide to the future. The strength of the Japanese Yen compared to sterling significantly boosted returns for UK-based investors.

Source: Lipper IM * to 31 December 2016

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 of stimulating economic growth. The adoption of a new Corporate Governance Code by Japanese businesses could also stimulate shareholder returns.

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 continue to view the Japanese stock market as undervalued, 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.

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 the 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. In the four years since Shinzō Abe gained power, the Japanese stock market, as measured by the Topix Index, has increased 86.1%* (in sterling terms). Please note that past performance is not a guide to future returns.

In 2016 the Topix Index rose 0.3%. However, sterling weakened significantly against the Japanese Yen, which boosted returns for UK-based investors and the index grew 23.4% in sterling terms.

Topix total return expressed in Pound Sterling and Yen

Past performance is not a guide to the future Source: Lipper IM* 30 December 2016

More defensive areas of the market, such as food and healthcare, performed well in the first half of the year. Funds with a bias towards these sectors therefore tended to outperform those with a bias towards more economically-sensitive areas, such as banks and insurance companies. The trend reversed in the second half of the year, however, and funds focused on lowly-valued, economically-sensitive sectors tended to outperform.

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

    +88.3%

  • Topix TR

    91.9%

Data correct as at 31/12/16. 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 January 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 Japan’s economic and social trends, such as the ageing population, and invest in companies that are poised to benefit from them.

The fund outperformed the Topix Index during the first half of 2016, however a bias towards lower yielding medium-sized companies and the pharmaceuticals sector led to significant underperformance in the latter half of 2016. The manager’s views and niche approach could enable this fund to complement more traditional Japan-focused funds. However, long-term performance has been inconsistent and volatile and means it does not feature on the Wealth 150.

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 was appointed manager of this fund in June 2016. While Dan Carter has a total of 12 years' experience analysing Japanese equities, his fund management track record is relatively short and therefore the fund does not currently feature on the Wealth 150, although we will continue to monitor performance.

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 small and medium-sized companies.

The fund’s performance disappointed in early 2016 due to a lack of exposure to better-performing defensive companies. However a bias to lowly-valued, high yielding small companies helped the fund outperform the wider market in the latter half of 2016. Scott McGlashan and Ruth Nash are experienced investors and we believe their emphasis on profitable companies with overlooked prospects will be rewarded over the long term, although there are no guarantees.

The fund invests in what the manager believes to be sound but out of favour businesses, which are capable of a turnaround.

Stephen Harker’s contrarian style of investing and focus on large, undervalued companies led to a few years of underperformance until mid-2016. However, the manager’s approach has since been vindicated and the fund has seen one of its best periods of performance in its eleven year history, which recovered its previous underperformance. Given the manager’s focus on out-of-favour companies we would expect the fund to go through shorter-term periods of weaker performance, however, the approach has rewarded investors over the long term, although this is not a guide to the future. We view Stephen Harker as one of the industry’s most knowledgeable and experienced investors in Japanese companies.

Andrew Rose runs this fund in a relatively conservative manner and invests in companies of all sizes across a diverse range of sectors. He seeks companies he feels could benefit from Japan’s economic strengths.

The fund outperformed its benchmark in 2016, but struggled earlier in the year due to a lack of exposure to more defensive areas of the market, such as the food and utilities sectors, which the manager viewed as overvalued. 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 more than made up for its previous underperformance.

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.

Paul Chesson uses his views on the wider economic environment to help identify undervalued areas of the market. He adopts a flexible, high-conviction approach.

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.

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.

  • 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.

  • 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.

  • 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.

  • 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.

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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