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 changed 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.
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 we think have the potential to outperform the broader Japanese market over the long term. Our favourites feature on the Wealth 50.
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.
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 Dectember 2012, the Japanese stock market, as measured by the FTSE Japan Index, has increased 134.7%* (in sterling terms). The shares of Japanese smaller companies did even better, which helped funds focused on this area of the market.
The Japanese stock market also did well over the past year as trade tensions between the US and China eased. The Japanese stock market rose 18.3%* over the period. The yen weakened against sterling so the market rose 14.8%* for UK-based investors. Remember past performance is not a guide to the future.
High-quality companies with the potential to pay high and rising dividends year after year remained popular and their share prices did well on the whole. On the other hand, businesses that have fallen upon hard times, but where there's scope for a turnaround, didn't do quite so well.
|Annual percentage growth|
| Dec 14 -
| Dec 15 -
| Dec 16 -
| Dec 17 -
| Dec 18 - |
Please remember past performance is not a guide to future returns. Source: *Lipper IM to 31/12/2019.
Wealth 50 Fund reviews
Other funds in this sector
Here we look at some other funds of interest following our most recent sector review. Please note the review period may be over a short time period and past performance is not a guide to future returns.
To view a full list of our favourite funds within the sector, visit the Wealth 50.
Sophia Li invests in companies that are dominant within niche markets. She thinks this can lead to high cash flow and profitability. She tends to invest in relatively few companies which adds risk.
Sophia Li has managed this fund since launch in October 2015 and it's done well so far. We put this down to the manager's ability to invest in companies with bright futures ahead of them. This is a relatively short time period over which to judge performance though and there are no guarantees the strong performance will continue.
We’d like to see how her career develops over a longer period of time before gaining more conviction but she has every opportunity to succeed. She’s using the established First State investment process which has led to great returns in the past. Plus she’s got the backing of Martin Lau, a fund manager we hold in extremely high regard.
The manager invests in financially sound businesses out of favour with other investors but with the potential to recover. He usually holds shares in a small number of companies which increases the fund’s performance potential, but is a higher-risk approach.
The fund made money over the past year but didn’t do as well as the broader Japanese stock market. Given the manager’s focus on out-of-favour companies, we expect the fund to occasionally underperform its benchmark because unloved companies can take time to recover. But we think Stephen Harker is one of the industry’s most knowledgeable and experienced investors in Japanese companies. His tried-and-tested approach has delivered strong returns over the long term, although this is not a guide to the future.
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.
Matthew Brett looks for high quality companies in good financial health with strong positions in their markets and outstanding management teams at the helm. He tends to invest in relatively few companies which adds risk.
Matthew Brett's been named as sole manager on this fund since predecessor Sarah Whitley stood aside in April 2018 but he's served as co-manager since 2008. He continues to benefit from the support of the Japanese equity team which we hold in high regard.
The fund's done well over the past year, although past performance isn’t a guide to the future. Japanese gaming company Colopl was a strong performer for the fund following the successful launch of a new game that uses augmented reality (AR) technology.
Michael Lindsell focuses on companies with market leading positions, strong brands and easily understandable business models that he believes are capable of standing the test of time. He invests in quite a small number of companies. This, combined with investments in smaller companies, adds risk.
The fund’s done well since the end of 2014 but performed similarly to the broad Japanese stock market before this. Our analysis shows the manager has invested in some of the best-performing consumer goods companies in recent years and this has boosted returns.
We’d prefer to see the manager deliver more consistent long-term returns so we’ll continue to monitor performance for now.
As this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme. If you are considering an investment please read the fund's Key Investor Information which contains further details.
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