UK investors have traditionally shied away from the Japanese equity market but the past five years have been strong ones for the asset class, leading to high returns.
While many investors remember the heavy losses that came when Japan’s asset bubble burst in the early 1990s, recent years have seen the country rally on the back of the Abenomics stimulus programme launched by prime minister Shinzo Abe.
Indeed, FE Analytics shows the average member of the IA Japan sector made a 49.96 per cent total return over the five years to the end of 2018, compared with a gain of just 18.41 per cent from the IA UK All Companies sector.
In this article, we attempt to identify the best IA Japan funds over this period, by looking at average decile rankings across 10 metrics: cumulative five-year returns up to the end of 2018, the individual returns of 2018, 2017 and 2016, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
Coming in first place in this research with an average decile ranking of 2.4 is FE Alpha Manager Michael Lindsell’s £289.6m Lindsell Train Japanese Equity fund.
This five FE Crown-rated fund has made a top-decile 118.66 per cent total return over the five years in question and is also in the peer group’s first decile when it comes to alpha, Sharpe ratio, upside capture and downside capture. However, it was in the bottom decile for its annualised volatility.
Lindsell has specialised in Japanese equities since 1985 and his investment approach is based on the belief that high-quality, cash-generative and easily understood business franchises tend to be a source of long-term returns but are often unvalued by the market.
This results in a concentrated portfolio of stocks that are held for the long term. Current top holdings include chemical and cosmetics company Kao, video game giant Nintendo and personal care name Shiseido.
In second place in this research is LF Morant Wright Nippon Yield, which scored 2.7 and is in the IA Japan sector’s top decile for five-year returns, alpha, maximum drawdown, Sharpe ratio and downside capture.
This fund aims for longer term income growth while preserving and growing the capital value. It concentrates on undervalued Japanese companies that have strong balance sheets, sound business franchises and attractive dividend yields.
Source: FE Analytics
GAM Star Japan Leaders, which is managed by Ernst Glanzmann and Reiko Mito, appears in third place after achieving an average decile ranking of 3.2.
This fund has a purely bottom-up approach that searches for long-established companies that have superior long-term growth potential, high return on equity and low leverage. In addition to this, they must be trading at a discount to the calculated fair value.
This leads to a concentrated portfolio that can look very different to the market and therefore be more volatile than its average peer. Our data shows GAM Star Japan Leaders is in the seventh decile for volatility over the period in question, but this led to top-decile total returns.
The largest member of the IA Japan sector is the £2.6bn Baillie Gifford Japanese fund, which has been managed by Matthew Brett since 2008. His longstanding co-manager Sarah Whitley retired last year.
Baillie Gifford Japanese is ranked 13th in this research after scoring a 4.2 average decile ranking. The FE Invest team said: “The fund is an attractive holding for long-term investors who can tolerate the higher risk.”
Schroder Tokyo is the second largest member of the peer group at £2.2bn and it is ranked 10th in this research, while Vanguard Japan Stock Index – the third biggest at just under £2.2bn – is in 20th place.
Source: FE Analytics
Sitting at the bottom of this research, however, is Neptune Japan Opportunities with its average decile ranking of 9.1. It has made a bottom-decile 1.76 per cent over the five years examined in this research.
At times, the fund has produced exceptionally high returns but in the past five years it has been one of the most volatile members of the peer group and suffered a maximum drawdown of more than 30 per cent.
New Capital Japan Equity, Lazard Japanese Strategic Equity, JOHCM Japan and Standard Life Investments Japanese Equity Growth are other funds that have consistently been in the bottom decile across the 10 metrics we looked at in this study.