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John Hawkins, chairman of the board, said the portfolio's NAV had suffered from the underperformance of Japanese property over the six months to 30 June, falling by 25.7 per cent against 2 per cent for its Topix Small index.

He said the fund was still looking for a leverage agreement to take advantage of low valuations in the Japanese small caps, which is its area of focus.

In its review, the portfolio's investment adviser Prospect Asset Management said J-Reits had been unable to raise new equity in the capital markets, meaning that developers were unable to sell properties into them. This has led developers to write down the value of some of these assets on their balance sheets, the firm said.

But the managers added Japanese companies looked better placed than others to deliver returns, particularly in light of lobbying by major investors.

"Two themes continue to dominate global markets in 2008: the credit crisis and the surge in oil. While Japan is certainly not immune to either of these factors, we would argue the economy is better positioned than other G8 countries, and the Japanese market is poised for a period of relative outperformance. We would also note that activism and shareholder accountability is gaining momentum among domestic institutions."

Prospect took the example of Nissay Asset Management, the investment management division of Japan's biggest life office, which voted against 90 per cent of "poison pill" resolutions this year.