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The Japanese equity funds giving you the most alpha for your buck

28 July 2017

In the next article of our ongoing series, we focus our attention on the popular IA Japan sector and sift out the funds with the strongest management skills and the lowest ongoing charges.

By Lauren Mason,

Senior reporter, FE Trustnet

Lindsell Train Japanese Equity, AXA Framlington Japan and Baillie Gifford Japanese are among some of the funds in the IA Japan sector to have achieved superior five-year returns through genuinely active management while keeping their fund charges low, according to research from FE Trustnet.

This comes as the fourth part of an ongoing series, which shines the spotlight on the charges versus the manager skill of equity funds across different sectors (previous articles have looked at global funds, UK funds and European funds).

Now, we have decided to focus on Japanese equity funds, an area of the market which has become increasingly popular recently due to improving corporate governance, weak yen and attractive valuations.

To calculate management skill versus low charges within the sector, we firstly discounted any passive funds, institutional-only funds or vehicles that don’t have at least five-year track records.

We then calculated the average ongoing charges figures (OCFs), five-year alpha generation (which measures over- or underperformance relative to a benchmark, which in this case was the Nikkei 225 index), and five-year information ratio (which assesses the degree to which a manager uses skill and knowledge to enhance the fund returns).

Once we were left with the funds in the sector that managed to beat all of these averages – as well as the five-year total return of the Nikkei 225 – we then ‘double-distilled’ the data by re-running the averages and whittling down the list once more.

From a list of 67 funds, only four passed through our filters for their low OCFs and their managers’ stock selection capabilities, as shown in the below table.

 

Source: FE Analytics

Out of these, the fund with the lowest OCF at 0.67 per cent is Baillie Gifford Japanese. The four crown-rated fund, which is headed up by Sarah Whitley and Matthew Brett, has a five-year alpha generation of 4.55 which means that, if the Nikkei 225 is presumed to have a return of zero over this time frame, it would have achieved a return of 4.55 per cent.

It also has an information ratio of 0.83 over five years. As a point of reference, FE Analytics’ glossary defines a ratio of 0.5 to be ‘good’, 0.75 to be ‘very good’ and 1 to be ‘outstanding’.

Whitley and Brett aim to provide long-term capital growth through a low-turnover portfolio of what they deem to be leading businesses which are trading on substantial discounts to their peers. As they believe growth stocks don’t tend to command a premium in Japan, they deem this stock selection process to be well-suited to the Japanese equity market.


Over five years, the £1.7bn fund has outperformed its average peer and its Topix index by 52.93 and 46.5 percentage points respectively with a total return of 157.72 per cent. This means it has outperformed the Nikkei 225 by 58.22 per cent over the same time frame.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

It has been awarded a place on the FE Invest Approved list, with the FE Research team commending its “good track record of making excellent stock picks and finding companies which can grow substantially over the longer term”. However, it warns the fund is a higher-risk way to invest in Japan as it is unafraid to take punchy positions in small and mid-caps.

The fund has a top-quartile Sharpe ratio – which measures risk-adjusted returns – over five years but is in the bottom quartile for its annualised volatility and its downside risk – which predicts a fund’s susceptibility to lose money during falling markets. it has a five-year maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 14.35 per cent.

Next up with an OCF of 0.85 per cent is AXA Framlington Japan, which has five FE crowns and is headed up by FE Alpha Manager Chisako Hardie.

Over five years, the £197m fund has returned 152.73 per cent compared to its average peer’s return of 104.79 per cent, its FTSE Japan benchmark’s return of 109.45 per cent and the Nikkei 225’s return of 99.5 per cent.

Over the same time frame, it has an alpha generation of 6.92 and an information ratio of 0.58.

Hardie aims to provide long-term capital growth through a portfolio of stocks ranging across the cap spectrum. For instance, it currently has 45.27 per cent allocated to small-caps, 24.02 in mid-caps and 26.75 per cent in large-caps.

These are chosen based on the quality of the management, future growth prospects and analysis of the companies’ financial statuses. Examples of the largest holdings within the 97-stock portfolio include outsourcing services company Outsourcing Inc, machinery firm Shima Seiki Manufacturing and telecoms corporation Softbank Group.

In terms of its five-year risk metrics, it is in the top quartile for its downside risk, Sharpe ratio and maximum drawdown of 7.29 per cent. It has a second-quartile annualised volatility over this time frame.


The third fund on the list is the five crown-rated Lindsell Train Japanese Equity fund, which has an OCF of 0.91 per cent. The fund, which has a five-year alpha generation of 5.28 and an information ratio of 0.41, has been managed by Michael Lindsell since 2004.

Over five years, it has outperformed its average peer and Topix benchmark by a respective 36.09 and 29.66 percentage points with a total return of 140.88 per cent. This is a 41.38 percentage-point outperformance of the Nikkei 225.

Performance of fund vs sector, benchmark and index over 5yrs

 

Source: FE Analytics

The fund has a notably low turnover portfolio and will hold between 20 to 35 stocks at any one time. Some 44.3 per cent of its holdings are consumer franchises while 26 per cent are media or software firms and 21.3 per cent are pharma & healthcare stocks. It also has a 5 per cent weighting in financials.

While the fund has indeed performed well, investors should note that it has a bottom-quartile annualised volatility and third-quartile downside risk over five years. That said, it is in the top quartile for its Sharpe ratio and maximum drawdown of 11.28 per cent.

The fourth and final fund on the list is T. Rowe Price Japanese Equity, which has an OCF of 0.92 per cent, an alpha generation of 4.02 and an information ratio of 0.41. The five crown-rated Sicav is domiciled in Luxembourg and is just €45.1m in size.

Over five years, it has returned 117.14 per cent and has done so with a top-quartile Sharpe ratio, annualised volatility, downside risk and its maximum drawdown of 10.7 per cent.

However, the fund is unavailable on most platforms.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.