FSSA Japan Focus – fund performance review

As part of our research and analysis, we analyse fund manager performance after charges, to find managers who are truly adding value for investors. We monitor this on an ongoing basis and how it compares with our expectations. This includes analysis of a manager's ability to add value through stock selection and their style of investing. We like those who stick to their investment process and are disciplined in applying it through different market conditions. As part of this analysis, we've conducted a review of the FSSA Japan Focus fund following a period of underperformance.

Fund expectations

The FSSA Japan Focus fund aims to grow investors' money over the long term by investing in high-quality Japanese companies that are dominant in their industry. Sophia Li and the FSSA team focus on high-quality companies that are capable of sustainable, above-average earnings growth, otherwise known as growth investing. The companies they invest in typically share three main characteristics: a strong franchise, a high-quality management team and an ability to provide sustainable growth over time.

The strength of this growth style compared to the wider Japanese stock market is significant. This means we expect the fund to perform differently to the main Japanese stock market. At times, it's likely this variation in performance will be large.

We think that over the long term (at least five years), Li has the experience and stock picking skill to outperform the wider Japanese stock market. At the same time, we think this fund is likely to have more ups and downs due to its notable growth style bias.

Performance analysis

Since launch in October 2015, the fund has returned 81.91%* to the end of October 2023. This compares to 77.38% for the MSCI Japan index. However, past performance is not a guide to future returns.

From launch until 30 September 2021, the fund returned 205.16% compared to the MSCI Japan index return of 86.30%. During this period, the growth style of investing was in favour in Japan, which helped this fund to outperform the wider market. The fund also benefited from the impact of the covid pandemic, with many of the stocks held in the fund growing due to the impact that lockdown had on consumer spending habits.

From 30 September 2021 to 31 October 2023, the fund returned -40.39% compared to the MSCI Japan index return of -4.79%. While there are a number of reasons for the underperformance, the growth style has been the most significant factor. Part of the reason for this is the ongoing push by the Tokyo Stock Exchange to improve the corporate governance standards of Japanese companies. This has been ongoing for several years but picked up momentum in 2023. These changes have had a greater impact on companies with low valuations, as many were seen to have lower corporate governance standards. This has been a headwind for the performance of this fund compared to the wider market as it avoids companies with poor governance standards.

Currency movements have also impacted performance. While returns in Japanese yen terms have been positive since the middle of 2022, a weak yen against the UK's pound has reduced returns for UK investors. This is a reminder of the impact currency movements can have on the returns of overseas investments, both positive and negative. Should the yen strengthen, this should boost returns for UK investors.

Our View

As part of our review of performance, HL's research team have met with Sophia Li several times.

It's been a difficult period of performance for the fund and, in periods where a manager's style is out of favour, we like them to stick to their investment process and focus on the longer term.

We also expect managers to take the time to review what has happened and consider areas where, with the advantage of hindsight, they could have made better decisions. We like it when managers go through this process as it can help them if they experience similar market conditions in future. Following discussions with Li and the team, we are comforted by the approach they have taken in this regard.

Overall we continue to have conviction in Li and the team to outperform the wider Japanese stock market over the long term. However, we think it is important that clients understand the growth style risk associated with this fund. This means that when growth style investing is in favour, we expect this fund to outperform and vice versa. It's also likely that this fund will continue to experience more ups and downs and have periods of performance that are significantly different to the wider market in Japan.

Past performance isn't a guide to the future. Source: *Lipper IM to 31/10/2023.