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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
22 January 2020

Summary

Japan is home to some of the best-known businesses on the planet. Toyota, Honda, Panasonic, and Nintendo to name a few. 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, resulting in recession. This was followed by years of sluggish growth, known as the Lost Decade, which put many people off investing in the country.

But sentiment changed after Shinzo Abe was elected Prime Minister in 2012. He introduced policies to stimulate economic growth which in turn created more interest in Japan's markets.

We think Japanese funds could be used to diversify a global portfolio focused on long-term growth. 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 Abe has aimed to boost economic growth and increase Japan's competitive position since he was elected in 2012. A huge quantitative easing programme, for instance, injected money into the economy to help boost wages and consumer spending.

Companies are 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 without immigration, which is strictly controlled, there is a smaller workforce to support it.

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.

There are just a handful of fund managers who we think have the potential to outperform the broader Japanese market over the long term. Those our analysts consider to have the greatest potential feature on the Wealth Shortlist.

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.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term potential

See THE WEALTH SHORTLIST

Performance

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

Since he gained power in Dectember 2012, the Japanese stock market, as measured by the FTSE Japan Index, has increased 134.7%* (in sterling terms). The shares of Japanese smaller companies did even better, which helped funds focused on this area of the market.

The Japanese stock market also did well over the past year as trade tensions between the US and China eased. The Japanese stock market rose 18.3%* over the period. The yen weakened against sterling so the market rose 14.8%* for UK-based investors. Remember past performance is not a guide to the future.

High-quality companies with the potential to pay high and rising dividends year after year remained popular and their share prices did well on the whole. On the other hand, businesses that have fallen upon hard times, but where there's scope for a turnaround, didn't do quite so well.

Annual percentage growth
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
Dec 18 -
Dec 19
FTSE Japan 17.6% 22.7% 14.4% -7.6% 14.8%
IA Japan 15.8% 23.6% 17.9% -11.5% 16.5%

Please remember past performance is not a guide to future returns. Source: *Lipper IM to 31/12/2019.

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

    +74.0%

  • FTSE Japan

    +75.2%

Data correct as at Lipper IM to 31/12/2019. Please remember past performance is not a guide to future returns.

We regularly review all the main investment sectors. Here we provide comments on a selection of funds investing in Japan. They’re provided for your interest but are not a guide to how you should invest. If you're not sure if an investment is right for you, seek personal advice. Comments are correct as at 31 December 2019.

For more information, please refer to the Key Investor Information for the specific fund. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term potential. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% a year - view our charges.

Wealth Shortlist Fund reviews

Other funds in this sector

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

The manager invests in financially 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 performance potential, but is a higher-risk approach.

The fund made money over the past year but didn’t do as well as the broader Japanese stock market. Given the manager’s focus on out-of-favour companies, we expect the fund to occasionally underperform its benchmark because unloved companies can take time to recover. But we think Stephen Harker is one of the industry’s most knowledgeable and experienced investors in Japanese companies. His tried-and-tested approach has delivered strong returns over the long term, although this is not a guide to the future.

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

The fund invests in the shares of every company in the FTSE Japan Index to ensure close tracking. We think it’s a good option for low cost, broad exposure to the Japanese stock market.

Matthew Brett looks for high quality companies in good financial health with strong positions in their markets and outstanding management teams at the helm. He tends to invest in relatively few companies which adds risk.

Matthew Brett's been named as sole manager on this fund since predecessor Sarah Whitley stood aside in April 2018 but he's served as co-manager since 2008. He continues to benefit from the support of the Japanese equity team which we hold in high regard.

The fund's done well over the past year, although past performance isn’t a guide to the future. Japanese gaming company Colopl was a strong performer for the fund following the successful launch of a new game that uses augmented reality (AR) technology.

Michael Lindsell focuses on companies with market leading positions, strong brands and easily understandable business models that he believes are capable of standing the test of time. He invests in quite a small number of companies. This, combined with investments in smaller companies, adds risk.

The fund’s done well since the end of 2014 but performed similarly to the broad Japanese stock market before this. Our analysis shows the manager has invested in some of the best-performing consumer goods companies in recent years and this has boosted returns.

We’d prefer to see the manager deliver more consistent long-term returns so we’ll continue to monitor performance for now.

As this 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 read the fund's Key Investor Information which contains further details.

Latest research updates

First State Japan Focus: June 2020 fund update

First State Japan Focus: June 2020 fund update

Tue 30 June 2020

In this newly enhanced fund update, Investment Analyst Dominic Rowles explains why we have added the First State Japan Focus Fund to our Wealth Shortlist of funds chosen for their long-term potential.

iShares Japan Equity Index: May 2020 fund update

iShares Japan Equity Index: May 2020 fund update

Tue 26 May 2020

In this newly enhanced fund update, Investment Analyst Dominic Rowles shares our analysis on the manager, process, culture, cost and performance of the iShares Japan Equity Index Fund.

Legg Mason IF Japan Equity - benefiting from Japan's elderly population

Legg Mason IF Japan Equity - benefiting from Japan's elderly population

Tue 29 October 2019

Hideo Shiozumi is one of the most experienced fund managers investing in Japan. In this update, we look at how his fund's performed and share our view on its prospects.

Man GLG Japan CoreAlpha - selling winners, buying losers

Man GLG Japan CoreAlpha - selling winners, buying losers

Mon 08 July 2019

Stephen Harker has built a successful career investing in some of Japan's most unloved companies. In this update, we find out where he's spotted opportunities.

BlackRock UK Special Situations – manager change

BlackRock UK Special Situations – manager change

Thu 20 June 2019

Luke Chappell has stepped down as co-manager of the fund to focus on other commitments. Roland Arnold, previously the fund's other co-manager, has taken on sole responsibility.

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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