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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
9 January 2019

Summary

Japan is home to some of the best-known businesses on the planet. Toyota, Honda, Panasonic, and Nintendo to name a few. But 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. This was followed by years of sluggish growth and put many people off investing in the country.

Everything changed after Shinzo Abe was elected Prime Minister in 2012. He introduced policies to stimulate economic growth which 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 Shinzo Abe has aimed to boost economic growth and increase Japan's competitive position in recent years. A huge quantitative easing programme, for instance, injects money into the economy to help boost wages and consumer spending.

The nation is 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 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.

Over the long term we think company earnings drive share prices. But in Japan corporate earnings are rising faster than share prices. Some see this as an indication of growth potential, although of course there are no guarantees.

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.

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.

Performance

Japan went through nearly two decades of poor economic growth after its economic bubble burst in the early 1990s. In recent years Prime Minister Shinzo Abe has tried to give the economy a new lease of life by introducing policies designed to kick-start growth.

Since he gained power in September 2012, the Japanese stock market, as measured by the FTSE Japan Index, has increased 104.4%* (in sterling terms). The shares of Japanese smaller companies did even better which helped funds focused on this area of the market.

Donald Trump’s threats to introduce more tariffs against China and fears of slowing economic growth and rising interest rates caused volatility in Asian markets over the past year. The Japanese stock market ended 2018 down 15.3%*. The yen weakened against sterling so the market fell 7.6%* for UK-based investors, although this should not be seen as a guide to the future.

High-quality companies with the potential to pay high and rising dividends year after year have been popular in recent years but performance was weaker in 2018. Businesses that have fallen upon hard times, but where there is scope for a transformation in fortunes did better although they still lost money.

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

    +50.2%

  • FTSE Japan

    +56.7%

*Data correct as at 31/12/18. Please remember past performance is not a guide to future returns.

Fund reviews

We regularly review all the main investment sectors. Here we provide comments on a selection of funds investing in Japan. They’re provided for your interest but not a guide to how you should invest. If you're not sure if an investment is right for you, seek personal advice. Comments are correct as at January 2019. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds across the sectors, visit the Wealth 50. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Wealth 50 Fund reviews

Other funds in this sector

Here we look at some other funds of interest following our most recent sector reviews. 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

Source for performance figures: Financial Express

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 is off to a great start. We put this down to her ability to invest in companies with bright futures ahead of them. This is a 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 lost money and delivered a weaker return than the broader Japanese stock market over the past year. Given the manager’s focus on out-of-favour companies, we expect the fund to occasionally underperform its benchmark because they take time to return to favour sometimes. 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.

Andrew Rose runs this fund quite conservatively. He invests in companies of all sizes, including higher-risk smaller companies, across a diverse range of sectors.

The manager’s chosen companies didn’t perform as well as many others in the same sectors over the past year. So the fund didn’t perform as well as the broader Japanese stock market.

Performance has been strong over the long term though and our analysis shows returns have been boosted by the manager’s ability to select companies with good prospects, although past performance isn’t a guide to the future. The manager’s more conservative approach means we don't necessarily expect the fund to beat the broader market when share prices are rising quickly. But we’d normally expect it to hold up well when markets are more subdued. We think this should help the fund perform well over the long term.

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.

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. They invest in quite a small number of companies which increases 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.

Latest research updates

Invesco Japan - looking for cheap companies in a cheap market

Invesco Japan - looking for cheap companies in a cheap market

Mon 28 January 2019

Paul Chesson and Tony Roberts look for companies that've been overlooked by other investors and aim to hold their shares until they return to favour. In this update, we discover where they've found value.

Legg Mason IF Japan Equity - a bumpy ride

Legg Mason IF Japan Equity - a bumpy ride

Thu 29 November 2018

The Japanese economy is going through some unprecedented changes. In this update, we look at how Hideo Shiozumi has invested the fund to benefit.

Man GLG Japan CoreAlpha - opportunity knocks

Man GLG Japan CoreAlpha - opportunity knocks

Fri 20 July 2018

Stephen Harker has invested in Japan since 1984. Find out why he thinks now is one of the best times to invest in unloved Japanese companies.

JO Hambro Japan - the backdrop remains positive

JO Hambro Japan - the backdrop remains positive

Tue 29 May 2018

Scott McGlashan and Ruth Nash are two of the industry’s most experienced fund managers. In our most recent update, we look at how they have positioned their fund and share our views on its prospects.

Schroder Tokyo - seeking undervalued companies in an undervalued market

Schroder Tokyo - seeking undervalued companies in an undervalued market

Fri 09 March 2018

In this update we review the fund’s recent performance and share the manager’s outlook for Japanese companies.

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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