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Tokyo drift

At a time when there is so much macro news that even the geeks at Asset Allocator are overwhelmed, the latest developments from Japan will likely have slipped under many radars. 

The country has lifted the last of it Covid restrictions on foreign tourists and business travellers, something which might be expected to boost growth.

As an economy, Japan has been embracing a very different path to other developed markets, with growth prioritised over inflation control. This might sound eerily familiar to those following UK politics at the moment.

This approach has had a mixed reception and the value of the yen has plunged. A dollar will now buy you ¥146 compared to ¥115 at the start of 2022. Again, this might sound familiar.

But in theory Japan offers diversification benefits for equity portfolios.

The average allocation to Japan among the allocators in our database has been dwindling for years. It is now 3.1 per cent - down from 4.3 per cent when our database was created in 2018.

As ever there are outliers, though the range of the distribution is much narrower than in other sectors. 

Several firms, including Tacit, have nothing in Japan, while Invesco has 1 per cent. 

At the other end of the spectrum You, the investment house formerly known as Beaufort, has 8.7 per cent in Japanese funds, while Evelyn Partners, the firm formerly known as Tilney, has 6 per cent of its "Active" model portfolio range (this is the range which used to be Smith & Williamson's portfolios).

You has actually reduced its overweight to Japan in recent months but it remains bullish in part due to the "health of the underlying equity market".

Morningstar, which has recently reduced its exposure to 4.2 per cent said it continues to "see merit" in Japanese holdings, and though it admits the tailwinds of structural reforms are now past it holds stock in the diversifying properties mentioned above.

The most widely held Japanese equity fund among the allocators we cover is Baillie Gifford Japanese.

Before it became synonymous with tech investing, Japanese equities was one area where Baillie Gifford had achieved some renown (indeed its Japanese Income Growth fund and its Shin Nippon and Japan trusts are all held by several DFMs in our database)

Its Japanese fund is held in the portfolios of nine of the DFMs we cover, though it has been an eventful 12 months for the fund, with three buys and four sells in 2022, and two further sales in the final quarter of last year. 

It has sharply underperformed its sector over the past three years, returning 2 per cent, versus the 8 per cent for the IA Japan sector.

It is marginally ahead of JPM Japan, which is held by eight DFMs and which has returned slightly more over three years at 2.7 per cent and it has been bought by a couple of DFMs in recent months.

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