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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
10 July 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.

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 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

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 December 2012, the Japanese stock market has risen strongly. The shares of Japanese smaller companies have done even better, which helped funds focused on this area of the market.

The Japanese stock market also rose over the past year despite coronavirus concerns. The country's so far managed to avoid the rapid growth in cases that lots of other countries experienced.

Many explanations have been touted for Japan's apparent ability to control the spread of the virus. From the country's targeting of early clusters to the willingness of the Japanese to follow government instructions in a crisis. Some also suggest that aspects of Japanese culture, such as bowing instead of shaking hands and strong social norms around mask wearing and hygiene, have helped slow the spread.

Annual percentage growth
Jun 15 -
Jun 16
Jun 16 -
Jun 17
Jun 17 -
Jun 18
Jun 18 -
Jun 19
Jun 19 -
Jun 20
FTSE Japan 7.7% 24.0% 9.3% -1.2% 6.8%
IA Japan 6.8% 25.6% 10.3% -3.4% 6.6%

Please remember past performance is not a guide to future returns. Source: Lipper IM to 30/06/2020.

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

    +52.4%

  • FTSE Japan

    +54.0%

Data correct as at Lipper IM to 30/06/2020. 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 to build your portfolio, 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 extra help, 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 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 on the HL platform. It is a maximum of 0.45% a year - view our charges. Comments are correct as at 30 June 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 out of favour with other investors but with the potential to recover. They usually hold shares 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 though and shorter-term periods of weaker performance should be expected.

That's been the case in more recent years. The managers' contrarian investment style has been out of favour. But we think Stephen Harker is one of the industry’s most knowledgeable and experienced investors in Japanese companies. We expect his fund to deliver strong returns over the long run, although there are no guarantees.

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 State 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 State investment process which we hold in high esteem. It's these factors that give us confidence the fund can do well over the long term, although there are no guarantees. Investors should note that the managers' flexibility to invest in derivatives also adds risk.

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. Remember past performance isn't a guide to the future.

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.

Fund research

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