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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
17 December 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 started changing 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. After almost eight years at the helm, Abe announced his retirement due to a chronic health condition. Abe’s right hand man and close personal friend, Yoshihide Suga, was announced as his successor on 16 September 2020.

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.

Abe aimed to boost economic growth and increase Japan's competitive position after he was elected in 2012. A large quantitative easing programme injected money into the economy to help boost wages and consumer spending. Meanwhile a fiscal stimulus package invested heavily in the country’s infrastructure, such as bridges, tunnels and roads. Suga’s appointment as Prime Minister is expected to mean a continuation of these policies, also known as Abenomics.

It’s too early to know the full extent of Suga’s plans for Japan, but the next general election is to be held in October 2021 so we’ll learn more about future plans then.

What we do know is that Suga has outlined some of his own priorities, including a Japan-wide digitisation strategy, improved telecommunications, a consolidation of regional banks and addressing the impacts caused by Japan’s ageing population. Before any of this can be achieved though he’s committed to prioritising the fight against coronavirus, and providing support for economic recovery.

Japan appears to be controlling the virus better than many other countries but recent increases in domestic and international coronavirus cases, and the resulting global economic slowdown, could hinder demand for Japanese goods and services overseas.

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.

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 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 went through nearly two decades of poor economic growth after its bubble burst in the early 1990s. Abe tried to give the economy a new lease of life by introducing policies designed to kick-start growth and while he was in power, the Japanese stock market rose strongly.

The coronavirus crisis has brought to light new challenges, increased stock market volatility and caused significant business disruption. But Japan’s apparent ability to control the virus has meant it’s economy has been less impacted than some, and the stock market's risen 0.5% so far this year*.

The shares of Japanese larger companies did better over the past 12 months, which helped funds focused on this area of the market. Health care, telecommunications and technology were the best performing sectors, as demand for efficient medical care, entertainment and internet-based services rose drastically. Sectors like oil and gas, utilities and financials didn’t do so well.

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, haven't performed as well. Investment styles come in and out of favour though, so we think investors should have a blend to ensure a properly diversified portfolio. Past performance isn't a guide to future returns.

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
Oct 15 -
Oct 16
Oct 16 -
Oct 17
Oct 17 -
Oct 18
Oct 18 -
Oct 19
Oct 19 -
Oct 20
FTSE Japan 31.4% 9.2% 0.3% 7.6% 0.9%
IA Japan 32.1% 11.0% -2.3% 7.3% 4.0%

Please remember past performance is not a guide to future returns. Source: *Lipper IM to 30/10/2020.

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

    +59.8%

  • FTSE Japan

    +56.2%

Data correct as at Lipper IM to 30/10/2020. 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.

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 October 2020.

Wealth Shortlist Fund reviews

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.

Stephen Harker 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.

Harker has an excellent record investing in Japanese shares. He's performed much better than the broader Japanese stock market over the long term. Our analysis puts this down to him choosing companies that've gone on to perform well after falling on hard times, although past performance is not a guide to the future.

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, but our analysis also suggests the fund didn’t hold up as well as the broader sectors, and size of company, the manager typically invests in. This means his stock-picking held back returns.

It was recently announced that Harker is to step down at the end of March 2021 after four decades in the industry, along with senior portfolio manager Neil Edwards. Senior portfolio manager Jeff Atherton will take over as lead manager and continue to be supported by co-manager Adrian Edwards.

The managers invest in companies that are dominant in their industries. They think this can lead to high cash flow and profitability. 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.

Latest research updates

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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

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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.

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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.

Fund research

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