Introduction
Simon Somerville, manager of the Jupiter Japan Income fund, believes the final few months of 2014 surprised some investors in the country.
He explains: “The Bank of Japan (BoJ) stepped up its monetary stimulus at the end of October, the massive Government Pension Investment Fund (GPIF) increased its allocation to domestic equities, and prime minister Abe postponed the next scheduled consumption tax rise to April 2017 from October 2015.
“The postponement came as a result of significantly weaker economic data, with GDP unexpectedly contracting by an annualised 1.9 per cent in the third quarter.”
Against this backdrop, data from FE Analytics shows that Japanese smaller companies have generated decent returns for investors.
In the year to January 6 2015, the Russell/Nomura SmallCap index delivered a modest 4.59 per cent return, outperforming both the Nikkei 225, which returned 1.10 per cent and the FTSE 100, which registered a loss of 2.05 per cent.
Returns over a three-year period are even more impressive, with the Russell/Nomura SmallCap index generating 31.04 per cent, just behind the Nikkei 225 index, which returned 32.77 per cent.
But investors will be wondering what the future holds for smaller companies in Japan.
Chern-Yeh Kwok, head of Japanese equities at Aberdeen Asset Management, notes Mr Abe’s victory means he has a fresh mandate to carry out his tougher policies.
But he cautions that “in the face of weak domestic consumption”, Japan is reliant on a rebound in the global economy.
“In the absence of a Chinese revival and given Europe’s anaemia, investors are betting that the steady improvement in the US economy can be counted on to rev up exports,” says Mr Kwok.
“Elsewhere, the recent plunge in oil prices may prove a significant relief for Japan’s economy, given that it is a huge net oil importer. This is fuelling expectations that the savings from fuel and energy may translate to increased consumer spending power and corporate profits in turn.”
Mr Somerville believes corporate earnings in Japan will continue to improve in 2015. In fact, he paints a very positive picture, as he reveals that better-than-expected interim results and a weak yen may prompt significant earnings upgrades in the first half of this year.
“The weak currency should also bring many tourists into Japan,” he adds.
“In addition, Japanese companies continue to improve return on equity and shareholder returns. Interim dividends were at record levels and, by the end of November 2014, share buybacks already exceeded the total level for the whole of the previous fiscal year (to March).”
Mr Somerville concludes that with both the GPIF and the BoJ looking to buy up equities on a relatively large scale and firms due to buy back approximately ¥3trn (£16bn) of their own shares annually, “the dynamics for the Japanese equity market look attractive” for 2015.
THE PICKS
Invesco Perpetual Japanese Smaller Companies
Osamu Tokuno manages this modestly sized £38.89m fund that launched in 1983. In its latest factsheet, Mr Tokuno states he focuses on growth stocks in the small- and mid-cap space, “paying particular attention to companies with steady and strong earnings momentum”. The fund has notched up decent returns, delivering 37.91 per cent in the three years to January 6 2015, but a rather disappointing 5.64 per cent over 10 years, according to FE Analytics. This fund is yet to prove itself to investors following a loss of 7.53 per cent in the year to January 6.
M&G Japan Smaller Companies
Long-term capital growth is the aim of this fund, which is managed by M&G’s Max Godwin and deputy manager Dean Cashman. According to M&G, Mr Godwin adopts a value approach to find companies that are trading below the potential returns he believes can be generated over the medium to long term. It has posted solid returns to investors, delivering 88.10 per cent over five years, according to FE Analytics. Meanwhile, those who have been invested in the fund for the past 10 years will have been rewarded with a return of 70.39 per cent.
EDITOR’S PICK
Baillie Gifford Japanese Smaller Companies
This offering seeks capital growth by investing across any sectors it believes are attractively valued. The fund factsheet states growth may come from innovative business models as well as those companies that are “disrupting” traditional Japanese business practices. John MacDougall runs this £179.07m fund, which currently has 25.7 per cent in consumer discretionary and 20.3 per cent in industrials. It was launched in April 1983 and since then has produced consistent returns, according to FE Analytics. Over 10 years to January 6 2015, it has delivered 76.31 per cent and over five years an even more impressive 102.23 per cent.
