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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
19 July 2019

Summary

Japan is home to some of the best-known businesses on the planet. Toyota, Honda, Panasonic, and Nintendo to name a few. But if you were asked to name more than those four you may struggle. That doesn't mean the investment opportunities stop at four stocks however – there are also lesser-known businesses with the potential to be the household names of tomorrow.

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

But everything 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 in recent years. 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.

Over the long term we think company earnings drive share prices. But in Japan, corporate earnings have risen faster than share prices. Some see this as an indication of growth potential, although of course there are no guarantees.

There are just a handful of fund managers we think have the potential to outperform the broader Japanese market over the long term. Our favourites feature on the Wealth 50.

Investment notes

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

Performance

Japan went through nearly two decades of poor economic growth after its 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 September 2012, the Japanese stock market, as measured by the FTSE Japan Index, has increased 119.7%* (in sterling terms). The shares of Japanese smaller companies did even better which helped funds focused on this area of the market.

The ongoing trade dispute between America and China has caused volatility in Asian markets over the past year. The Japanese stock market ended the period down 7.4%*. The yen weakened against sterling so the market fell 1.2%* for UK-based investors, although this should not be seen as a guide to the future.

High-quality companies with the potential to pay high and rising dividends year after year have been popular in recent years and their share prices have generally done well. On the other hand, businesses that have fallen upon hard times, but where there's scope for a turnaround, remained out of favour.

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

    +67.9%

  • FTSE Japan

    +71.8%

*Source: Lipper IM. Data correct as at 30/06/19. Please remember past performance is not a guide to future returns.

Fund reviews

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 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 30 June 2019. 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 across the sectors, visit the Wealth 50. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Wealth 50 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 50

Source for performance figures: Financial Express

Sophia Li invests in companies that are dominant within niche markets. She thinks this can lead to high cash flow and profitability. She tends to invest in relatively few companies which adds risk.

Sophia Li has managed this fund since launch in October 2015 and is off to a great start. We put this down to her ability to invest in companies with bright futures ahead of them. This is a short time period over which to judge performance though and there are no guarantees the strong performance will continue.

We’d like to see how her career develops over a longer period of time before gaining more conviction but she has every opportunity to succeed. She’s using the established First State investment process which has led to great returns in the past. Plus she’s got the backing of Martin Lau, a fund manager we hold in extremely high regard.

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 Japanese stock market lost money over the past year and the fund fell slightly further. 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. Recent investments include pharmaceutical company Sugi Holdings. The manager thinks it could be well placed to benefit from Japan's ageing population and the increasing demand it's placing on healthcare. He also bought shares in Infomart, a cloud-based platform that connects restaurants to suppliers, allowing them to cut costs.

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

The fund's had a tough time in recent years. Investors have largely overlooked the out-of-favour companies the managers invest in and preferred to invest in larger companies with more dependable earnings. The managers think these companies are too expensive and their prospects don’t justify such high share prices.

The fund struggled over the past year too and lost more money than the broader Japanese stock market. Our analysis suggests the managers' investments in the financials and consumer goods sectors held back returns.

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

Please note as this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.

Latest research updates

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.

J O Hambro Japan - looking for unloved companies in an unloved market

J O Hambro Japan - looking for unloved companies in an unloved market

Tue 18 June 2019

Scott McGlashan and Ruth Nash are experienced investors but their fund’s performance has gone off the boil in recent years. In this update, we find out what’s held back performance and share the managers’ outlook.

Schroder Tokyo - removal from the Wealth 50

Schroder Tokyo - removal from the Wealth 50

Wed 03 April 2019

We've removed Schroder Tokyo from the Wealth 50 list of our favourite funds.

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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