T. Rowe Price Japanese Equity, Comgest Growth Japan and Baillie Gifford Japanese Income Growth are three funds that FundCalibre’s Darius McDermott believes are well-poised to take advantage of future trends. 
McDermott, managing director of FundCalibre, said that three decades since the Japanese asset bubble burst things are only just starting to return to normal.
Indeed, if investors had put £1,000 into Japan’s Nikkei 225 30 years ago they would have only just made that money back today, said McDermott (pictured).
“The country was left in a severe financial crisis and economic stagnation – from which it took decades to recover,” McDermott said.
But that recovery has been catalysed by current prime minister Shinzō Abe whose ‘three arrows’ stimulus programme have helped Japan prosper again
McDermott said that he remains “relatively” optimistic about the outlook for Japan based on three reasons.
The first is that Japan stands to benefit from its relationship with the US amid increasingly hostile trade relationships.
“Donald Trump and Abe have found some common ground with regards to tariffs,” he said. “They have signed a trade-enhancement agreement that will lower agricultural tariffs in Japan, industrial tariffs in the US and set new rules for digital trade between the world’s first- and third-largest economies.”
Secondly valuations look attractive compared with other developed markets, said McDermott, and relative to its own history.
“Not only this,” he said, “but returns on equity are above 9 per cent and both dividends and share buybacks are at record highs, as corporate governance improves.”
Finally, McDemott said that throughout Abe’s tenure there has been political stability and has been mandated to continue with his economic reforms.
Below, McDermott recommends three funds to provide exposure to the Japanese opportunities.
T. Rowe Price Japanese Equity
The first fund on McDermott’s list is Archibald Ciganer’s €1.3bn T. Rowe Price Japanese Equity fund. The fund – which launched at the end of 2005 – looks for companies that the manager believes are on the right side of change or undergoing transformation.
“Manager [Ciganer] aims to find businesses he believes can deliver sustainable growth, before other investors recognise their potential,” McDermott said. “He will adapt his investing style as needed to suit changing market conditions, which has helped him to outperform in different environments.”
Performance of fund vs sector & benchmark under Ciganer
Source: FE Analytics
Since Ciganer was appointed at the end of 2013, the four FE fundinfo Crown-rated fund has made a return of 109.19 per cent compared with a 82.56 per cent gain for the TSE Topix benchmark and a return of 76.91 per cent. It has an ongoing charges figure (OCF) of 0.85 per cent.
Comgest Growth Japan
Next up is the £1.6bn Comgest Growth Japan fund, co-managed by Chantana Ward, Richard Kaye and Makoto Egami.
McDermott said the fund is a concentrated portfolio of only 30-40 “high-quality, long-term growth companies” either headquartered or carrying out their predominant activities, in Japan.
“The managers believe that Japan is full of under-researched companies with great capital discipline, barriers to entry and growth,” he added. “Their mission is to find them.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The four Crown-rated fund has outperformed over the past three years, making a 57.19 per cent total return, in excess of the IA Japan’s 27.17 per cent gain and the TSE Topix benchmark’s 26.22 per cent return. The fund has an OCF 0.89 per cent.
Baillie Gifford Japanese Income Growth
The final fund on McDermott’s list is Baillie Gifford Japanese Income Growth, which follows a slightly different investment strategy but is still in keeping with the growth style that the asset manager is famed for. The fund is managed by Matthew Brett and Karen See.
“Launched in July 2016, Baillie Gifford Japanese Income Growth aims to benefit from the improving corporate governance in Japan, as more and more businesses move towards a progressive dividend-paying policy,” he said.
“The managers use a well-tested growth investing philosophy and process, combined with a focus on companies with the best dividend growth opportunities.”
Performance of fund vs sector & index since launch
Source: FE Analytics
The £702.3m fund has made a return of 49.84 per cent since launch also outperforming the average IA Japan peer over the same time frame (40.32 per cent) and the Topix benchmark (40.51 per cent). Baillie Gifford Japanese Income Growth has a yield of 2.22 per cent and an OCF of 0.62 per cent.