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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
01 October 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 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. Investor sentiment began to change, and markets reacted well. But after almost 8 years at the helm, he announced his retirement and was replaced by Yoshihide Suga on 16 September 2020.

Suga’s appointment initially offered the promise of fresh and progressive government policies and continued economic support. But his short tenure has revolved purely around the pandemic, and to some extent this has overshadowed his other efforts. He faced domestic criticism for several things over his time as Prime Minister, but particularly on how he handled the virus. Suga announced his resignation in September 2021, with a replacement likely to be made towards the end of 2021.

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.

In the early stages of the coronavirus crisis, Japan controlled the virus well, reporting low cases and relatively relaxed restrictions. But a resurgence of the virus meant Japan was forced to announce a state of emergency. As Japan’s vaccination rates were significantly lower than other developed nations, cases kept climbing and lockdown measures were extended and pushed onto other parts of the country.

More recently though, the country’s vaccine efforts have accelerated drastically, which could help end lockdown measures, and the economy is starting to show signs of recovery. Japan continues to face challenges though and periods of stock market volatility should be expected.

Whilst Japan remains off the radar for many investors, our analysis suggests the Japanese stock market looks attractively valued. 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 performance 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

Earlier in 2021, the Japanese stock market climbed to heights not seen for 30 years. Since then though, it’s lost steam and generally lagged other developed markets. This has largely been driven by the country’s slow vaccination rollout and prolonged lockdown measures.

Over the past year, the FTSE Japan index rose 17.1%*, compared to the IA Japan sector’s gain of 18.2%. This means the average Japan fund outperformed the broader Japanese stock market by 1.1%.

Sector performance has been mixed over the past year. Utilities have continued to perform poorly but the biggest difference is the poor performance of the healthcare and pharmaceutical sectors. This is driven by the resurgence of the virus and pressures it’s put on Japan’s healthcare system.

On the other hand, basic materials, industrials and technology led the charge as the strongest sectors. Technology is still seeing the benefits from increased demand for online connectivity, remote entertainment, tele-healthcare and internet-based services. Whereas basic materials and industrials are reaping the rewards from high levels of imports and exports.

Following several years of weaker returns, value-focused funds, which invest in unloved companies with the potential to recover, performed well over the past year, although this is over a short time period, and is not a guide to the future. In contrast, growth-focused funds, which invest in companies capable of above-average earnings growth, didn’t do so well. We think this is a good reminder that investment styles come in and out of favour, so investors should have exposure a variety of different ones to ensure a properly diversified portfolio.

Annual percentage growth
Aug 16 -
Aug 17
Aug 17 -
Aug 18
Aug 18 -
Aug 19
Aug 19 -
Aug 20
Aug 20 -
Aug 21
FTSE Japan 17.0% 8.5% 0.2% 0.7% 17.1%
IA Japan 18.8% 8.8% -2.4% 3.2% 18.2%

Please remember past performance is not a guide to future returns. Source: *Lipper IM to 31/08/2021.

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

    +53.8%

  • FTSE Japan

    +49.9%

Data correct as at Lipper IM to 31/08/2021. 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 August 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. This is also known as value investing.

The team’s investment style returned to favour over the past year which helped drive returns. Investment styles come in and out of favour though, and 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. Despite the manager’s growth-focused investment style going out of favour over the past year, performance has been strong, aided by good stock picking. Remember past performance isn't a guide to the future.

Latest research updates

FSSA Japan Focus Fund: May 2021 update

FSSA Japan Focus Fund: May 2021 update

Fri 18 June 2021

Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, cost and performance of the FSSA Japan Focus Fund.

iShares Japan Equity Index: April 2021 Fund Update

iShares Japan Equity Index: April 2021 Fund Update

Fri 30 April 2021

In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, cost and performance of the iShares Japan Equity Index Fund.

Man GLG Japan CoreAlpha: February 2021 fund update

Man GLG Japan CoreAlpha: February 2021 fund update

Mon 01 March 2021

Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, cost and performance of the Man GLG Japan CoreAlpha fund.

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.

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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