iShares Japan Equity Index: April 2022 fund update

• BlackRock has been managing index portfolios since 1971
• This fund provides low-cost exposure to large and medium-sized companies in Japan
• It’s closely tracked the FTSE Japan Index since launch
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The iShares Japan Equity Index Fund invests in Japan, home to some of the best-known businesses on the planet, including Toyota, Sony, and Nintendo to name a few. This fund invests in company shares of all sizes and across a variety of industries including consumer discretionary, industrials and technology.

An index tracker fund is one of the simplest ways to invest and can be a low-cost starting point for a portfolio aiming to deliver long-term growth. We think this fund could be used to diversify a global portfolio or be a good addition to a portfolio of tracker funds.

Manager

Kieran Doyle is a Senior Portfolio Manager in BlackRock's Institutional Index Equity Team. He's been part of the team since 2004 and officially became the lead fund manager in 2016. Every equity index fund at BlackRock has a primary, secondary and tertiary manager, who each have the ability to run the fund, along with the wider team. The wider team is well-resourced and experienced in index investing.

BlackRock’s global approach allows them to work closely with their teams across the world, helping drive more efficient management of their funds. We have positive conviction in the ability of BlackRock to provide simple and effective tracking options for investors.

Process

The fund aims to track its benchmark, the FTSE Japan, by investing in every company in the index, and in the same proportion. This is known as full replication and helps the fund track its benchmark closely.

Keeping costs low is a key part of the team’s strategy to track the index closely. The portfolio managers communicate with teams in Japan to ensure trades are placed at the best price, helping keep costs low.

Approximately 5% of the fund invests in smaller companies. They have greater growth potential than their larger peers but can experience more extreme price movements. This can benefit the fund in the long term but adds risk.

The fund also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently. The fund can also lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs lower.

Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients.

Culture

BlackRock is currently the largest asset manager in the world, running $10 trillion globally as of January 2022. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As one of the world's largest asset managers, and with lots of resource and knowledge under its belt, BlackRock aims to continue to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.

The team running this fund works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG integration

Blackrock was an early signatory to the Principles for Responsible Investment and has offered ESG-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks. Overall, we feel Blackrock’s ESG integration is still a work in progress.

As the iShares Japan Equity Index isn't an ESG-specific fund, there are no company exclusions applied like tobacco or weapons, however an ESG version of this fund is now available.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

Blackrock’s Investment Stewardship (BIS) Team aims to vote at 100% of meetings where it has the authority to do so, meaning they vote at around 16,000 meetings in 85 markets each year. In 2021, BIS engaged 1,057 times with companies across the Asia-Pacific region. For example, in 2021 they engaged with Mitsubishi UFJ Financial Group (MUFG).

MUFG is one of the world’s largest financial institutions, with operations in more than 50 countries. There was a shareholder proposal for disclosure of a plan outlining the company’s business strategy to align its financing and investments with the goals of the Paris Agreement. Blackrock voted against this proposal as while they agree with the shareholder’s general intent, the legally binding nature of it could have potential consequences and the company’s ability to progress going forward. BIS believe that the company has demonstrated reasonable progress so far in disclosing and addressing climate-related risks and opportunities measured against both local and global peers.

Cost

The fund has an ongoing annual fund charge of 0.08%. We believe this is excellent value when compared with other passive funds in this sector. This is also one of the lowest cost funds on the HL platform for passively tracking the Japanese market. Our platform charge of up to 0.45% per annum also applies.

Performance

Since launch in July 2005, the iShares Japan Equity Index fund has continued to track the FTSE Japan well. As expected from index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, this difference has been reduced due to the strategies used by the BlackRock team. Past performance isn’t a guide to future returns.

Over the last 10 years, the FTSE Japan Index has returned 136.52%*. Over the same timeframe, the fund has returned 129.11% to investors.

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.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE Japan Index well in future, though there are no guarantees. A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022.

More about the iShares Japan Equity index Fund including charges

iShares Japan Equity Index Key Investor Information