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“Past performance is no guide to future performance” has become the background noise of the fund management industry, akin to “do not leave your bags unattended” in train stations and “smoking can cause a slow and painful death” on a packet of Benson & Hedges.

Just as about 25 per cent of the UK population continues to smoke, the track record is still likely to be the first thing on a fund factsheet IFAs will look at. Their defence is clear – what else can a fund be judged by? But the historical approach has earned the community many critics.

Who, after all, does not wish they hadn’t bailed out of the FTSE last summer? Yet the index’s three-year track record indicated nothing but sweetness and light. At this year's Legg Mason investment conference, one fund manager said the client he admired the most took his money out of the top fund in his portfolio at the end of each year and transferred it to the very worst performer.

It is curious that intermediaries accept this contrarian logic from the likes of Anthony Bolton or Hugh Young, yet shy away from practising it themselves.

Which IMA sectors, then, have been at the very bottom of the pile on a three-year cumulative basis? Japanese Smaller Companies and Japan are alone in having delivered losses – 35.9 per cent and 7.6 per cent respectively – over the period to 1 September.

Indeed, Japan has become something of an unfunny joke in investment circles. Since the great crash of 1990, the Tokyo Stock Exchange has dripped returns with the spluttering irregularity of a Ukranian showerhead. Many investors have given up waiting. According to the IMA statistics, the Japanese sectors accounted for 3.3 per cent of total retail assets under management in July 2000. They have since shrunk to just 1.7 per cent.

But for a contrarian, this unambiguous picture of disfavour is a cause for optimism. David Varley, who manages the £166m Royal London Japan Growth trust, notes that with a very few exceptions, Japanese stocks are now cheaper than they have been for 25 years.

“On price to book, Japan is trading at just above the value of its assets. If the market were to fall 10 per cent further, the major banks would be trading below book value and Toyota and Sony would be trading at book value. If that were to happen, I think a lot of people would focus very vocally on Japan,” he explains.

A price-to-book ratio of one means the company is valued at no more than the sum of its assets. Yet companies generate cash for investors – a lot of cash in the cases of Toyota and Sony. Buying at book value would be easy money. This is why it has historically been the market floor: the last time price to book hit one, in early 2003, the market went on to rally 60 per cent. “I think the downside is limited and the upside is considerable,” says Mr Varley.

Since August, he has therefore been gradually shifting his portfolio away from defensive stocks – pharmaceuticals, tobacco and railways – towards weather-beaten sectors such as construction and automobile parts. He cites the JS Group, which manufactures building parts for interiors and exteriors, as an example of a company which has very high market share but is trading at absurdly low levels, in this case just 70 per cent of book value.

Although Mr Varley sees no immediate catalyst likely to unlock the value in such stocks, he is prepared to wait it out in the conviction that the market simply cannot fall much further.

Andrew Rose, who manages Japanese equity for Schroder Investment Management, offers a further reason why Japan is due for a rally: it had nothing to do with the credit crisis.

“The Japanese economy is experiencing a purely cyclical slowdown. There’s been no run up in house prices, no debt problems. The slowdown is caused only by weak export markets,” he explains, noting that if oil prices stabilise or continue to fall, there will be scope for interest rate cuts in Europe which may reinvigorate consumer markets, such as cars, on which Japan depends.

“There were fears that mortgage rates wouldn’t fall in line with interest rates, but the Freddie Mac and Fanny Mae rescue means they probably will,” he adds.

Mr Rose is also cautiously optimistic the resignation of Yasuo Fukuda as prime minister on 1 September could herald a new economic era. “There is the possibility of quite significant political change because of all the things going wrong. The 2005 rally was in part driven by belief in the Junichiro Koizumi’s reform agenda. It’s absolutely not a given, but the reformist sides of both parties could come to the fore,” he says.

In the short term, meanwhile, he notes the likelihood of an imminent election, with the usual growth-friendly policies. “They may bail out the problems in the property market in particular,” he suggests.

A final wind which could fill the sails of Japanese equity is inflation. The return of inflationary pressures to the world economy, through the higher oil price, is poised to overturn many assumptions of the past decade, including the notion that Japan is an economic vacuum.

The vast majority of Japanese savings are kept in government bonds and cash. These have naturally performed well – far better than equities – in the deflationary conditions which prevailed in Japan for the last 18 years. But if inflation reappeared – even imported, supply-side inflation – “real assets” such as equity should outperform fixed income.

The re-emergence of inflation globally is too recent a phenomenon for its impact yet to be felt in Japan. But, having risen to a decade high of 2.4 per cent in July, it might – just might – be the catalyst that every value fund manager on the globe has been waiting for.

If this proves over-optimistic, investors can fall back on one sure argument: in Japan, they have very little to lose.