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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.

Josef Licsauer - Investment Analyst
12 April 2021

Summary

The Japanese stock market is home to some of the best-known companies on the planet, Toyota, Sony and Honda to name a few. There are also lesser-known businesses with the potential to become the household names of tomorrow.

Despite this, Japan is currently one of the world's most unloved stock markets, largely driven by the lingering scars of the period known as ‘The Lost Decade'. Japan's economic bubble burst in the early 1990s, resulting in recession and years of sluggish growth. Many people were put off investing in the country.

Former Prime Minister, Shinzo Abe, introduced policies designed to stimulate the economy and reignite interest in Japan's markets. The Japanese stock market responded well to these policies and investor sentiment started to change.

Abe announced his retirement, stepping down due to a chronic health condition. He was replaced by Yoshihide Suga on 16 September 2020. His appointment is expected to mean the continuation of Abe's policies but also hopes of fresh and progressive government plans, further support for the economy and vows to beat the coronavirus pandemic.

We think Japanese funds could be used to help diversify a global portfolio focused on long-term growth. Some funds 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 risks, 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.

After rising to power in 2020, Suga committed to first conquering coronavirus but also outlined his plans to boost the economy. These include new investments in Japan's digital transformation, developments in green technologies, improved telecommunications, consolidation of regional banks and addressing the impacts of Japan's ageing population.

Japan appears to be controlling the virus better than many other countries and showed remarkable resilience throughout most of 2020. The country was forced to declare a state of emergency in January 2021 due to rising case numbers, but even then, the caseload was far lower than that of many other developed nations.

While the country continues to face challenges, and periods of stock market volatility should be expected, we still think Japan is a great investment opportunity. However it remains off the radar for many investors. As a result, the Japanese stock market looks attractively valued, according to our analysis.

We believe there are just a handful of fund managers with the potential to outperform the broader Japanese market over the long term. Those our analysts consider to have the greatest long-term 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 performance potential

See THE WEALTH SHORTLIST

Performance

Japan's economy saw some of its worst performance since 1955 and the Japanese stock market fell drastically during February and March last year.

It's recovered well since then though, climbing to heights not seen for 30 years. Performance was boosted by a weaker yen, optimism about the development and rollout of vaccines and hopes for government stimulus.

Over the past year, the FTSE Japan index rose 26.3%, compared to the IA Japan sector which grew 32.0%*. That means the average fund in the IA sector outperformed the broader Japanese stock market by 5.7%.

The shares of larger Japanese companies outperformed their medium-sized and smaller peers over the past 12 months, which helped funds focused on this area of the market. Telecommunications and technology were the best performing sectors, as demand for online connectivity, remote entertainment, tele-healthcare and internet-based services rose. In contrast, utilities, healthcare and pharmaceuticals & biotechnology were some of the worst performing sectors.

Broadly speaking funds with a focus on companies capable of above-average earnings growth, otherwise known as 'growth' companies, also performed well. On the other hand, value-focused funds, which often invest in companies undergoing a turnaround, didn't perform as well over the past year. The performance of value-focused funds has improved in recent months, although this is over a short time period, and is not a guide to the future.

Investment styles come in and out of favour, so we think investors should have exposure to a variety of different ones to ensure a properly diversified portfolio.

There is still a lot of uncertainty ahead though, and companies will continue to face challenges from the virus. Only time will tell how well Japan recovers and how it deals with the new normal, but we think there are still plenty of investment opportunities for long-term investors.

Annual percentage growth
Mar 16 -
Mar 17
Mar 17 -
Mar 18
Mar 18 -
Mar 19
Mar 19 -
Mar 20
Mar 20 -
Mar 21
FTSE Japan 32.8% 7.5% -0.9% -2.1% 26.3%
IA Japan 32.5% 9.1% -3.7% -3.5% 32.0%

Please remember past performance is not a guide to future returns. Source: *Lipper IM to 31/03/2021.

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

    +77.2%

  • FTSE Japan

    +74.9%

Data correct as at Lipper IM to 31/03/2021. Please remember past performance is not a guide to future returns.

Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want a personal recommendation, you can also ask us for financial advice.

The fund reviews below are provided for your interest but are not a guide to how you should invest. For more information, please refer to the Key Investor Information for the specific fund. Remember all investments and income from them 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.

There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges. Comments are correct as at 31 March 2021.

Wealth Shortlist Fund reviews

Source for performance figures: Financial Express.

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

The fund invests in 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.

The fund has a small exposure to higher-risk small and medium-sized companies.

Jeff Atherton and his team invest in financially sound businesses, which are out of favour with other investors but they believe have the potential to recover. They usually invest in a small number of companies which increases the fund's performance potential, but is a higher-risk approach.

Atherton, who has 30 years' experience investing in Japan, took over as the fund's lead manager in January 2021 from Stephen Harker, having been co-manager since 2011. He and his team invest in financially sound businesses, which are out of favour with other investors, but they believe have the potential to recover.

It can take time for a company's share price to recover following a disappointment and shorter-term periods of weaker performance should be expected. That's been the case in more recent years. The team's investment style has largely been out-of-favour, and value companies performed particularly poorly since the start of 2020 amid the coronavirus crisis.

That said, there has been recent signs of recovery as value investing has returned to favour. It's a reminder that investment styles come in and out of favour, and that investors should hold a diversified portfolio and focus on the long-term.

The managers invest in companies that are dominant in their industries. They believe the strength and quality of the companies they own is what drives returns over the long run. They tend to invest in relatively few companies which adds risk.

Sophia Li has been the lead manager of this fund since launch in October 2015. She benefits from the support of the experienced First Sentier team, including highly-regarded co-manager Martin Lau. He provides oversight and challenge, along with a wealth of experience. The managers also use the established First Sentier investment process which has led to great returns in the past. It's these factors that give us confidence the fund can do well over the long term, although there are no guarantees.

The fund's done well since launch. Our analysis puts this down to the managers' ability to invest in companies with outstanding prospects, regardless of their size or what sector they're in. Recent performance has been particularly strong, aided by the managers' growth style of investing and good stock picking. Remember past performance isn't a guide to the future.

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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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