Japan is the world's third largest economy and home to one of the largest stock markets in the world - the Tokyo Stock Exchange. It features 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. As a result, many people were put off investing in the country.
Former Prime Minister, the late Shinzo Abe, introduced policies designed to stimulate the economy and reignite interest in Japan's markets. His policies were well received, and investor sentiment began to change, as markets reacted well. 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 revolved around the pandemic, and this overshadowed his other efforts. Suga announced his resignation in September 2021. He was replaced by Fumio Kishida, who's signalled a clearer stance on foreign policy, promoting a stronger US-Japan relationship for example, and has laid out his plan to help Japan's economy grow going forward.
We think Japanese funds could be used to help diversify a global portfolio focused on long-term growth. Some funds can provide exposure to larger, more established businesses, while others prefer exposure to the higher growth prospects of riskier smaller companies.
Our view
Japan is full of world-leading companies famed for their quality and reliability.
But like many countries around the world, Japan's been on a rollercoaster ride over the last few years. A resurgence of COVID-19 meant Japan was forced to place parts of the country into a state of emergency and tighten restrictions, including restricting foreign visitors. This threw Japan's economic recovery off track.
Though more recently, Japan's economy has showed signs of recovery and could be returning to a position of strength. The country reopened to foreign visitors towards the end of 2022, which has led to some recovery in the tourism sector and increased consumer spending. Though the country continues to face challenges and periods of stock market volatility should be expected.
While it remains off the radar for many investors, our analysis suggests the Japanese stock market looks attractively valued. That said, we believe there are only a handful of fund managers with the potential to outperform the broader Japanese market over the long term.
Those funds our analysts consider having 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 SHORTLISTOur 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. These fund ideas are reviewed and updated periodically to ensure they match our latest views.
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. It invests in every company in the FTSE Japan Index and in the same proportion. This is known as full replication and helps the fund track the index as closely as possible.
While it invests more in larger companies, it also invests in higher-risk smaller companies in line with the index. The fund offers exposure to a range of different sectors, including industrials, consumer discretionary, technology and healthcare. We think it's a good option for low-cost, broad exposure to the Japanese stock market.
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 previously being 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 a style known as value investing.
The team's investment style had previously been out of favour for some time, but it's returned to popularity over the past couple years, 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 increases the potential for up or downside return, so this 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. More recently though, the fund's performance has struggled. The manager's growth-focused investment style has fallen out of favour which has dragged on returns.
Latest news on this sector
Japan deep dive – are we on the cusp of a bull market?
Josef Licsauer | 11 July 2023
We look at how Japan’s economy and stock market has fared, where the opportunities could be and how Japanese Wealth Shortlist funds are doing. Read article.
Josef Licsauer
11 July 2023 | 3 min read
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.
Latest research updates on funds in this sector
Man GLG Japan CoreAlpha: December 2023 fund update
Thu 07 December 2023
In this fund update, Lead Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Man GLG Japan CoreAlpha fund.
FSSA Japan Focus fund: July 2023 update
Fri 07 July 2023
In this update, Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, ESG integration, cost and performance of the FSSA Japan Focus fund.
Man GLG Japan CoreAlpha: February 2023 fund update
Wed 22 February 2023
In this fund update, Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Man GLG Japan CoreAlpha Fund.
FSSA Japan Focus Fund: July 2022 update
Mon 01 August 2022
Investment Analyst Josef Licsauer shares our analysis on the manager, process, culture, ESG integration, cost and performance of the FSSA Japan Focus Fund.
iShares Japan Equity Index: April 2022 fund update
Mon 25 April 2022
In this update, Passive Investment Analyst Alex Watkins shares our analysis on the manager, process, culture, ESG Integration, cost and performance of the iShares Japan Equity Index Fund.
Fund research
Our expert research team provide regular updates on a wide range of funds.