Japanese market moves upwards

The latest figures from the IMA reveal the highest monthly inflows into Japan funds in almost two years as net retail sales hit £62m. This was a significant improvement from the £4m average outflows recorded in the previous 12 months.

Tim Gardner and Alan Thein, multi-managers at Legal & General, say in their latest fund commentary: “Momentum has been built and maintained since late last year and this is the most concerted and co-ordinated effort to pull Japan out of its economic funk in more than two decades.

“Indeed, the latest data continues to show positive signs. For example: economic growth forecasts for Japan are currently being raised, which is hardly surprising as the Japanese economy grew at the fastest pace among the G7 economies in the first quarter of 2013 with an initial estimate of a 0.9 per cent quarterly increase or 3.5 per cent a year that was recently revised up to 4.1 per cent a year.”

A number of significant developments that took place towards the end of last year have been a major catalyst behind the rallying stockmarket.

The Share Centre’s head of investment research Andy Parsons, explains: “December 2012, the Liberal Democratic Party won the general election; ‘promising’ increased fiscal stimulus, aided infrastructure spending, and allowing the Bank of Japan to determine more growth focused policies, particularly around inflation with a target of 2 per cent. All of these measures have led to what has become known as ‘Abenomics’. The announcements and measures outlined back in December 2012 have been further aided by the most recent upper house elections in July, in which the prime minister’s ruling coalition party won a majority. Whether all of the measures announced to date will work remains to be seen.”

For decades, Japan has been plagued by minimal economic growth, deflation and a stubbornly strong currency, but among equity funds, there have been some very good success stories.

Legg Mason’s £188.8m Japan Equity fund, managed by Hideo Shiozumi, has delivered top-quartile returns and topped the IMA Japan peer group in one, three and five-year time periods. It is this long-term outperformance that has seen the fund this year enter the exclusive Investment Adviser 100 club.

According to the latest factsheet, the fund has a 30.89 per cent weighting to the healthcare sector, with a further 24.23 per cent allocation to information technology.

Appearing with the Legg Mason offering is the £176.6m Neptune Japan Opportunities fund, managed by Chris Taylor, which in spite of dropping into the fourth quartile based on three-year performance, has retained its top-quartile position across one, five and 10-year periods.

Of the fund, Mr Parsons says: “The Neptune Japan Opportunities fund is ideal for those investors wishing to add or increase portfolio exposure to this region, offering a fund focusing on companies which dominate their sectors and whose earnings are driven by global sales. [However], investing in Japan is not for the faint-hearted and should definitely be viewed with a longer term time horizon.”

Japanese Smaller Companies funds have also performed well, with 50 per cent of the top-10 outperformers in five years being of the smaller company variety. Top of these is the £74m M&G Japan Smaller Companies fund.

Manager Max Godwin, who has been at the helm of the fund since March 2007, invests in companies that appear in the bottom third of all publicly listed equity in Japan by market capitalisation. In five years, the fund has returned 142.43 per cent and has consistently produced top-quartile returns over one, three and 10-year time periods.

Similarly, the £87.9m Baillie Gifford Japanese Smaller Companies fund has also produced outstanding returns, and this year made its way into the Investment Adviser 100 club of consistently outperforming funds.

Of course, with good always comes bad and there have been some abysmal performers – all of which come from the IMA Japan sector.

The worst, based on five-year performance data, is the Axa Rosenberg Japan fund with a return of just 18.74 per cent to August 8. Closely following this is the Gam Star Japan Equity fund, with a 21.83 per cent return, although the past six months have seen this fund jump into the top quartile.

For investors, the key is to wade carefully through the products available and keep one eye firmly on the Japanese government and the potential for continued success.

Jenny Lowe is features editor at Investment Adviser