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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
24 March 2022

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 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 already signalled a clear stance on foreign policy, promoting a stronger US-Japan relationship for example, and laid out his plan to help Japan’s economy grow throughout 2022 and beyond.

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.

But like many other countries around the world, Japan has been on a rollercoaster ride over the last few years. A resurgence of the virus in February 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.

Large scale vaccination efforts and falling infection rates have allowed parts of the economy to reopen more recently but Japan continues to face challenges and periods of stock market volatility should be expected. And while it 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

The Japanese stock market saw some strong bursts of performance in 2021. A brighter outlook on Covid-19, the hopes of fresh stimulus from a new Prime Minister and improved vaccine rates helped the Nikkei reach heights not seen in over 30 years.

More recently though, the Japanese market’s lost steam. This was mainly driven by investor concerns following interest rate hikes in the US (and the impact it has on tech stocks). But also the impact of the Omicron variant delaying plans to reopen the economy. These lengthy restrictions have sapped consumer spending and economic growth.

Overall, the Japanese stock market has lagged other global markets over the 12 months to 28 February, falling 0.56% over the period.

More market ups and downs are likely. Japanese markets face a variety of external pressures, including the Ukraine crisis, which has meant oil prices and other commodities have surged. Japan is deemed resource scarce and is reliant on importing its energy.

On the other hand, healthcare and pharmaceutical sectors have continued to perform poorly, driven by the persistence of the virus and the pressures it’s put on Japan’s healthcare system.

Value-focused funds, which invest in unloved companies with the potential to recover, have outperformed growth-focused funds over the period. These invest in companies capable of above-average earnings growth and have been hit by increasing inflation and rising interest rates. This is over a short time period, and is not a guide to the future. But we think this is a good reminder that investment styles come in and out of favour, so investors should have exposure to a variety of different ones to ensure a properly diversified portfolio.

Annual percentage growth
Feb 17 -
Feb 18
Feb 18 -
Feb 19
Feb 19 -
Feb 20
Feb 20 -
Feb 21
Feb 21 -
Feb 22
FTSE Japan 10.71% -6.98% 4.50% 17.98% -0.56%
IA Japan 12.88% -9.02% 2.30% 23.91% -2.74%

Please remember past performance is not a guide to future returns. Source: Lipper IM to 28/02/2022.

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

    26.25%

  • FTSE Japan

    26.62%

Source: Lipper IM. Data correct as at 28/02/2022. 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 28 February 2022.

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 had previously been out of favour for some time, but it’s returned to favour over the past year and this 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. 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. Remember past performance isn't a guide to the future.

Latest research updates

iShares Japan Equity Index: April 2022 fund update

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.

Man GLG Japan CoreAlpha: February 2022 fund update

Man GLG Japan CoreAlpha: February 2022 fund update

Tue 08 February 2022

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

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.

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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