Japan in 2013 was one of the success stories of the year. The introduction of Abenomics helped its stockmarket soar as the MSCI Japan index climbed 24.8 per cent.
But in the first three months of the year, its fortunes have reversed a little, with the MSCI Japan index recording a loss of 7.29 per cent for the year to date to March 28, compared with a 0.55 per cent loss from the MSCI AC World index and a small 0.11 per cent gain from the MSCI AC Europe index.
Although the overall market has dipped in the first quarter, more than half of the IMA Japan sector has outperformed the index, with the average loss for the sector measured at 7.18 per cent.
Interestingly, four of the five best-performing funds so far this year, according to FE Analytics, were those that struggled in 2013 and ended the year towards the bottom of the sector.
The £31.1m Lindsell Train Japanese Equity fund is currently the only vehicle in the sector to be posting a positive return of 0.38 per cent, with its nearest rival, the CF Morant Wright Nippon Yield fund, sitting in second place with a loss of 0.81 per cent.
Meanwhile, the £43m Axa Framlington Japan fund, run by Chisako Hardie, has recorded a loss of 1.41 per cent for the year to date – but it is one of the more consistent offerings, currently ranking third in the sector, and ranked sixth in 2013 with a return of 34.11 per cent, well above the sector average of 25.84 per cent.
The common denominator in many of 2014’s top funds in the sector seems to be a higher weighting to consumer-related stocks, with the Lindsell Train Japanese Equity fund holding approximately 40.8 per cent of the portfolio in consumer franchises.
But with Japan set to increase consumption tax in April, with a hike from 5 per cent to 8 per cent, it raises the question as to whether this will have any kind of knock-on effect on the markets in general and those portfolios with high exposure to the consumption arena.
However, as Ms Hardie points out in the latest factsheet for the fund: “We believe the government’s determination to revitalise the economy will absorb any negative impact.”
She adds: “The Japanese economy is now in the early stages of a long-term recovery phase. Corporate Japan, which now has a very healthy balance sheet, appears ready to start growing again. We believe that the consolidation in many industries and overseas mergers and acquisitions by Japanese companies will be active over the next few years.”
As market sentiment in the region remains jumpy after too many false dawns, the likelihood is that the Japanese market will remain volatile until there are concrete signs that its economy is strong enough to withstand the consequences of a tax hike and further structural reform. Until then, it may be a bumpy ride.
Nyree Stewart is features editor at Investment Adviser
Japan: fund picks
While the IMA Japan sector as a whole has struggled in the first part of 2014, there are still some consistently strong offerings that are worth a look.
Legg Mason Japan Equity fund
Managed by Hideo Shiozumi of Shiozumi Investments on behalf of Legg Mason, this £247.8m fund has delivered consistent performance, including topping the sector in both 2011 and 2013. Meanwhile, on a cumulative basis, its five-year performance to March 28 also leads the sector with a return of 169.68 per cent, helping it move into the Investment Adviser 100 Club in 2013. The manager looks for firms that benefit from the ‘new Japan’ theme and its highest weighting is to healthcare at 34.19 per cent.
Old Mutual Japanese Equity fund
This is one of the smaller funds in the IMA Japan sector at just £27.2m, in spite of having launched in 1986. Currently managed by Ian Heslop, this fund has placed in the top 10 of the sector across three-, five- and 10-year periods. It is a widely diversified portfolio with approximately 179 stocks and its highest sector weighting is to consumer discretionary at 25.7 per cent of the portfolio.
Baillie Gifford Japan Trust investment trust
This investment trust is managed by Sarah Whitley and has total assets of £271.46m. Performance of the trust has been consistently strong, topping the AIC Japan Equities sector across three and five years, a record that placed it in the 2013 Investment Adviser 100 Club. The vehicle holds from 40-70 positions, mainly in small- to medium-sized firms. The highest sector weighting is to commerce and services at 22.8 per cent of the portfolio.
