Investors in Japanese equity funds

Many of these companies may not be on the radar of global investors and lack sufficient liquidity to be owned within a global portfolio, Matthew Brett, co- manager of Baillie Gifford’s Japanese fund, points out.

However he says these companies can be accessed in a specialist Japanese equities fund.

Mr Brett says: “Indeed a number of our clients have come to us in order to gain access to some of the most exciting Japanese equities businesses and address an underweight in Japanese equities within their global portfolios.”

Nick Peters, portfolio manager at Fidelity Solutions, says there are many appealing long term growth opportunities.

Ultimately, he says investors should only invest in equity funds if they are comfortable with the additional level of risk that equities as an asset class entail.

For those happy with such risk, Mr Peters says Japan presents a good opportunity to help build a global portfolio, offering exposure to the world’s third largest economy, as well as the global economy through its export-focused corporates.

Ultimately the decision to invest in Japanese equities needs to be taken within the context of overall portfolio construction, asset allocation and, of course, investor risk appetite, says Ash Misra, head of portfolio specialists at Lloyds Bank Private Banking.

In principle, he says most investors, except for extremely risk-averse investors with near-zero appetite for the investment risk of capital loss, should seek equity exposure as part of a well-diversified approach to portfolio construction and asset allocation.

Mr Misra says it should go without saying, of course, that the larger the investor’s risk appetite, the greater the allocation to relatively riskier assets like equities within his or her portfolio.

He says: “Japan is an important developed market, accounting for just under 10 per cent of the market value of most global equity indices.

“As such, an allocation – to a greater or lesser extent, depending on risk appetite, for future returns from Japanese equities is essential in most investors’ portfolios.

“The role an exposure to a Japanese equity fund performs within a portfolio is really no different from that performed by other constituents of that portfolio: a potential stream of future investment returns (capital growth and dividends) that is diversified in terms of correlation with possible returns from other components of the portfolio.”

Any investor with a global view and with a tolerance for volatility should consider this type of fund, says Michael Stanes, investment director at Heartwood Investment Management.

He says yen assets also have some hedging characteristics at times of stress.

Mr Stanes says: “Holding Japanese equities can provide some diversification benefits to a global investor given the lower correlation of Japanese equities with global equities.

“However, this should not make up the major part of an investor’s portfolio given potentially higher volatility.”