Introduction
In fact, there are five trusts investing in Japanese small caps and five open-ended funds providing exposure to this asset class.
In the 12 months to February 17 the country’s main index, the Nikkei 225, has gained just 0.02 per cent as Japanese equities took a hit during the market volatility in the early part of this year. But in the same period the Russell Nomura Small Cap index climbed 5.7 per cent, in spite of the recent headwinds, and small caps have outperformed in 2016, too.
According to BNY Mellon Investment Management’s report ‘Debating the state of Japan’, 2016 began with the “worst year-opening week for Japanese stocks since 1997 – five consecutive negative sessions that wiped more than half of 2015’s gains off the board”.
In a monthly round-up, Whitechurch Securities notes: “Japanese equities were very volatile in January, driven by fears over China’s economy and global growth, while also being compounded by Japan’s currency gaining favour with traders again.”
But the firm believes Japan’s equity markets look cheap compared with other developed markets. “In addition, quantitative easing policies have weakened the yen, making exporters competitive, while the recent slowing in the domestic economy has led to further stimulus from the BoJ [Bank of Japan],” it adds.
Despite the introduction of negative interest rates by the central bank at the end of January, investor sentiment has failed to improve materially.
Osamu Tokuno, manager of the Invesco Perpetual Japanese Smaller Companies fund, says: “Post recent market weakness, Japan’s small/mid-cap equity market is expected to become more stable, in our view. We believe the market should benefit from the negative interest rate policy of the BoJ. This is expected to prevent further yen appreciation and its potential negative impact on exporters’ earnings.
“In our view, overall corporate earnings may grow modestly over the coming fiscal year, and investors may become more selective against this backdrop.”
Paul Markham, global and international portfolio manager of equities at Newton Investment Management, says: “In Japan – at least as much if not more than in other markets – differentiating between individual businesses can often yield strong results and a weaker market may represent an opportunity to add.”
This explains why many Japanese smaller-cap funds and trusts have been able to outperform in the past year.
Nicholas Weindling, Naohiro Ozawa and Shoichi Mizusawa, managers of the JPMorgan Japan Smaller Companies Trust, observe Japan is a cyclical market with large exposure to global manufacturing sectors.
The managers conclude: “Uncertainty over the macroeconomic environment could weigh on the Japanese market in the near term. However, the long-term outlook is positive – government policy is supportive, developed market economies are improving and companies are starting to emphasise shareholder returns.”
THE PICKS
Aberdeen Global Japanese Smaller Companies
The Asian equities team behind this ¥95.8bn (£600m) fund have helped it post consistent returns to investors. In the five years to February 17 it returned 62.1 per cent, against the peer group average of 47.5 per cent, FE Analytics data shows. A sector breakdown reveals 24.2 per cent of the fund is exposed to consumer goods, with a 24 per cent weighting to industrials and 17.7 per cent in consumer services. This is reflected in its top-10 holdings, among which are metalworking manufacturer Amada Holdings, hair and skincare products firm Mandom and holiday provider Resorttrust.
JPMorgan Japan Smaller Companies Trust
Co-managers Nicholas Weindling, Naohiro Ozawa and Shoichi Mizusawa aim to produce long-term capital growth by investing in small and medium-sized Japanese companies. The managers focus on themes such as factory automation, the use of internet and online content, the ageing population and Japanese brands with globally strong positions. The fund’s 10 largest holdings include Invincible Investment, Casio Computer and Cosmos Pharmaceutical.
EDITOR’S PICK
Baillie Gifford Japanese Smaller Companies
John MacDougall is the manager of this £277m fund, which offers exposure to “attractively valued smaller companies that we believe offer good growth opportunities”. The manager looks for growth from firms “disrupting traditional Japanese business practices”. Launched in April 1983, the fund has built up a track record of outperformance, with data from FE Analytics showing it delivered 71.3 per in the three years to February 17, compared with the IA Japanese Smaller Companies sector’s average return of 46.3 per cent. It has held up particularly well in the past year, returning 15.2 per cent, while its peer group struggled to return above 5 per cent.
