This month marks the sixth anniversary of Abenomics.
By and large, I think it has been successful: Prime Minister Shinzo Abe's first two arrows of monetary easing and fiscal stimulus were 'fired' very quickly.
The third arrow – structural reform – has been slower, but progress is being made and, as I find myself reminding people more often than I perhaps should, he is trying to make a generational shift in attitudes and behaviour: Japan lay almost dormant for a good 20 years.
Senior management, used to conserving businesses rather than growing it, rewarded loyalty rather than productivity. Workers were accustomed to working hard in a job for life and did not expect wage rises in an economy where prices remained flat or fell for two decades.
But all that is changing and corporate governance has improved markedly.
While the fund tends to be more volatile than many of its peers, due to its bias towards smaller companies, risk-adjusted returns are excellent. Almost every listed company has at least one external director on its board, almost half have an explicit target dividend, inflation has started to come through – even in wages – and profits are good.
And, importantly, after many years of a revolving door in Japanese political leadership, Mr Abe's long tenure has brought stability.
More over, the political establishment, bureaucrats and corporate leaders have united behind his reforms.
As the manager of my Best in Class fund this week said: “After two lost decades, corporate Japan has completely re-invented itself. I enjoy finding, contacting and connecting with these new 21st century businesses.”
The manager is Chisako Hardie and the fund is Axa Framlington Japan.
A lesser known fund in this sector, Axa Framlington Japan has just £300m in assets under management, despite having been launched in 1984.
Ms Hardie has been at the helm since 2010 and, over her tenure, the fund has returned 137.75 per cent in sterling terms compared with 92.5 per cent for the IA Japan sector average, according to data from FE Analtyics, April 16 2010 to December 4 2018.
She has also outperformed the sector and index in six of the past eight calendar years since she took over, proving that she can consistently add alpha in what can be a challenging market.
While the fund tends to be more volatile than many of its peers, due to its bias towards smaller companies, risk-adjusted returns are excellent.
Born and educated in Japan, Ms Hardie is one of the most experienced, and one of the best Japanese managers in the industry. She joined Axa in 2006 having previously worked for Scottish Widows, Martin Currie, Scottish Provident and Scottish Life.
She has a BA in Sociology from Keio University, Tokyo and is also a member of the Securities Analysts Association of Japan.
Working with Axa Framlington's Japanese equity team, Ms Hardie identifies thematic trends which generate ideas and inform her stock picking. Recent themes include the globalisation of Japanese food, ageing populations, automation and the increased use of electronics in cars.
She then looks for companies with long-term growth prospects, independent of short-term news flow or what is going on in the wider economy.
She finds many of her best ideas in the small-cap space – hence the bias – but reduces risk by being well-diversified: the fund currently has 98 underlying holdings. Investments are often held for many years but stocks will be sold when they become fully valued.
While the fund favours growth, its valuation discipline also means it is less extreme in terms of style than some of its peers, which has helped her outperform in different types of market environments.
Despite all this the fund has remained somewhat under the radar - a hidden gem delivering stellar returns.
Darius McDermott is managing director of FundCalibre
