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The last quarter was bleak for Japanese equity funds, which lost more than the market indices. Alison Cratchley, S&P Fund Services analyst, said: “No S&P-rated fund delivered a positive return in the three months to the end of August 2008.”

The median fund in the S&P Japan mainstream equities sector lost 13.1 per cent over the quarter, bringing its year-to-date loss to 17.8 per cent. This compared with losses of 11 per cent and 14.2 per cent for the S&P Japan 500 index.

The median small and mid-cap fund losses came to 21.1 per cent year to date compared with a 14.2 per cent fall for the SmallCap 250.

S&P found the main reason for poor performance was incorrect sector positioning, even by highly rated funds. There was extreme divergence of returns among sectors, with the leaders being defensives such as utilities, healthcare and telecoms and the laggards being cyclicals, with significant losses in financials, materials, industrials and IT.

The S&P triple-A-rated IFDC Japan Dynamic fund and the UBAM IFDC Japan Equity fund, both managed by Albert Abehsera, underperformed due to their overweights in IT and underweights in electric power and gas.

Joji Maki of the S&P double-A-rated Baring Japan Growth trust was similarly hit by underweighting electric power and gas and pharmaceuticals and overweighting machinery.

In spite of the losses, managers remained upbeat about prospects.

Ms Cratchley said both Japanese companies and households had strong balance sheets,” citing Mr Abehsera’s estimate that the total exposure of corporate Japan to toxic loans was no more than $15bn (£8.6bn).

Japan has also underperformed for so long that valuations are now more compelling, S&P said. Managers interviewed by S&P said p/e ratios, yields, returns on equity and debt-to-equity metrics were attractive.