Japan was one of the best performing stock markets in 2013, one of the best years the economy has seen in five years. The country also won the right to stage the 2020 Olympic Games in Tokyo.
Shinzo Abe, the prime minister, has been pushing through an aggressive economic reform since taking office in December 2012. In an attempt to kick-start the country’s growth and end the market stagnation, Mr Abe’s economic policy has been dubbed ‘Abenomics’, and it had seemed to be doing the trick.
But so far in 2014, it has been up and down, with no consistency in performance. Although May saw one of the first monthly rises, and the Topix was up nearly 4.5 per cent, which many have said could be the start of another bull market. Japanese equities are expected to strengthen as the year furthers, and the growth and reform strategies undergone by the government begin to take shape and produce positive results for the economy.
Despite being one of the best developed equity markets, the country has never fully recovered from the banking crisis it saw in the 1990s as well as the sharp decline in property prices. Japanese pension funds have also drastically cut their investments in shares, so there are far fewer buyers in the market now compared to 20 years ago.
More recently, Japan has revised its growth figures up for the January to March period of this year due to strong growth coming from investment in business. The country’s economy is said to have grown 1.6 per cent during the period, up from its initial estimate of 1.5 per cent, despite many predicting a downward revision. The growth figures translate to an annualised growth rate of 6.7 per cent, up from its initial 5.9 per cent.
Business investment in the country rose 7.6 per cent from the previous quarter, and consumer spending also climbed 2.2 per cent. In another bout of Abenomics, the sales tax in the country was raised from 5 per cent to 8 per cent on 1 April this year, the first increase Japanese consumers had seen in 17 years. As a result, before the implementation of the tax, many businesses and consumers increased spending, thus boosting Japan’s growth further.
The country’s central bank, the Bank of Japan, has also been undergoing quantitative easing, and the bank’s governor Haruhiko Kuroda said the country was only half way to meeting its 2 per cent inflation target, so the QE programme will continue. The country has been in the process of quantitative easing since October 2010, and in 2013, the bank embarked on a US$1.4tn (£816bn) stimulus programme in the hope of being rid of the deflation that has been haunting the country for more than a decade.
Performance
According to the Investment Management Association (IMA), Japan funds saw net retail inflows of £45m in the month of May - down from the previous 12 months’ £71m average. The Japan space comprises both the Japan and Japanese Smaller Companies sectors.
The Table shows the country’s top performing funds over the past five years according to Morningstar data. The top performing fund over five years is the £244m Legg Mason Japan Equity fund, which has been a consistent top performer for many years. Managed by Hideo Shiozumi, who has managed the fund since inception in 1996, the fund returned £2,629 on an initial £1,000 investment over five years - 21.3 per cent annually.
As the Table shows, despite the fund having a difficult past 12 months, it is also the top performing fund over three years and 10 years to 1 July. The fund additionally has had low volatility - which is measured over the past 36 months.
This is staggering compared to other funds within the sector. In fact, just seven funds overall managed to return on their initial investment in the past year, and the second-best performing fund saw an annualised return of 16.3 per cent on five years, or £2,132. The average return over five years is £1,457 - 7.8 per cent annually. The Legg Mason fund’s return is 80 per cent greater than the average fund, and 142 per cent greater than the lowest performing fund over the period, the GAM Star Japan Equity fund.
The Legg Mason fund predominantly invests in healthcare - 35.6 per cent - and information technology - 22.4 per cent - rather than the traditional Japanese fund plays of the growing consumer trend. The Chart shows the fund’s asset allocation as of June 2014.
The Japanese Smaller Companies is a smaller sector, with just six funds, but four have made the top 10 funds.
There are not many pure Japan funds available, and market turbulence over the past five years has made for a challenge when it comes to fund selection and looking at the country going forward. But Japanese equities is an asset class with great diversity and a strong balance between risk and return, without having to compromise on cost.
Five questions to ask
1. How has the fund been performing? Don’t let the short-term returns put you off – Japanese funds have had a turbulent few years, but always look to the long-term when picking a fund.
2. What sectors does the fund invest in? Even though the consumer trend has been growing in Japan for the past few decades, not all funds with a high allocation to consumer sectors have been performing well. Take a look into the fund’s asset allocation before investing.
3. What currency is the fund denominated? A Japan fund could be denominated in yen, sterling or dollars. While it might not make an initial difference, if exchange rates dramatically change, it could work out to be more expensive to be invested in an yen-denominated fund.
4. What size companies does the fund invest in? There are not many funds within the Japanese Smaller Companies sector, but it is worth looking at the average market cap for the stocks the fund invests in. You could be investing in large companies that do not have as much room to grow as smaller caompanies.
5. Is the fund global? Many Japanese companies could be based in America, so you could be buying into a North American fund. Research where the companies are listed.
