As we pointed out in our Top 100 Funds feature in July 2012, Japan has been the world's most disappointing major stock market. But, as it is a major economy, a balanced portfolio would still have some exposure. However, over the six months to 10 December 2012, the MSCI Japan Index has risen 5.8 per cent and analysts at Coutts and Rothschild Wealth Management are tipping it as an economy that could surprise on the upside in 2013.
This positive story coincides with some good news for one of the three Japan funds that made it into our Top 100 funds list. GLG Partners is to reopen the GLG Japan CoreAlpha fund (ISIN: GB00B3F46Y30) to new investors. GLG Japan CoreAlpha is a large-cap equity fund with management based on a contrarian and value approach. Its performance has been excellent over the long term, but has been negative over 2011 and 2012.
The fund, managed by Stephen Harker, was temporarily closed to new subscriptions on 30 March 2012 to "protect existing investors" against the potential liquidity risk of increased flows to the funds and a fall in the turnover of shares on the Tokyo Stock Exchange.
Richard Phillips, head of UK retail at Man Group, the parent company of GLG, says: "The soft closure was a precautionary and temporary measure. We believe there is currently sufficient capacity available to open the strategy again to new investors. This decision has been considered carefully and we believe that reopening the strategy would pose no potential risk to performance at this time and we are pleased to make the fund available again to new investors."
The reopening of the fund means it is lower risk for investors, and coincides nicely with analysts' views that now is a good time to buy into Japan. Dirk Wiedmann, head of investments at Rothschild Wealth Management, says: "Japanese equities are undervalued and unloved. We are increasing our exposure."
He believes a weaker yen and negative real interest rates could trigger an upward re-rating of Japanese equities over the next 12 to 18 months.
At the beginning of November, Japanese Prime Minister Yoshihiko Noda announced an early general election on 16 December and the lower house of parliament was dissolved. The outcome of the election is likely to determine policy development for the Bank of Japan. However, victory for the Liberal Democratic Party (which seems likely), followed by a new governor for the Bank of Japan in the spring, could lead to much more aggressive action to raise the rate of inflation.
"If Japan follows the monetary path of the US and UK and is able to introduce negative real interest rates, we expect Japanese equities to rally strongly," says Mr Wiedmann. "We believe there are compelling opportunities in the Japanese equity market. Valuations are attractive in absolute terms, relative to other major markets and when compared with historical levels; valuation measures such as the price to book ratio look exceptionally cheap.
"After a long period of paying down debts, many Japanese companies now have very strong balance sheets, with around half the members of the Topix completely debt-free. These cash-rich firms are paying out more to shareholders, and estimates from Nomura suggest total dividends and share buybacks will be around nine trillion yen this year, up from just over six trillion in 2009."
Analysts at Coutts also say Japanese equities could deliver further positive returns in 2013, depending largely on the degree of monetary easing following the appointment of a new Bank of Japan governor and potential for fiscal stimulus. Other factors that they say could be favourable for Japan next year include a potential global recovery, improving corporate earnings and light foreign investor positioning. Should economic indicators continue their positive trend, they believe Japan is likely to benefit due to the high weighting (60 per cent) in the Topix of cyclical sectors, or those that are sensitive to changes in the economic cycle (including industrials, consumer discretionary, technology and materials).
Most foreign investors hold limited exposure to Japanese equities. If global growth improves and Bank of Japan monetary easing turns more aggressive, investors may increase their positions.
If you prefer cheap passive exposure, then Lyxor ETF Japan (LTPX) tracks the Topix Total Return index which is the benchmark for the GLG Japan Core Alpha (see Topix top 10 holdings below). This is a synthetic ETF with a TER of 0.50 per cent that exposes investors to counterparty risks. Alternatively, if you prefer a physical ETF, that buys the underlying holdings in the index, the iShares MSCI Japan (IJPM) tracks the MSCI Japan index for a TER of 0.59 per cent.
GLG Japan CoreAlpha Performance vs Index
| Performance | 2008 | 2009 | 2010 | 2011 | 2012* |
|---|---|---|---|---|---|
| Fund total return | 5.72% | 9.29% | 24.10% | -16.69% | -9.01% |
| Topix Total Return | -40.62% | 7.62% | 0.98% | -17.00% | 8.22%** |
Source: Morningstar. *To 30 November 2012. ** To 10 December 2012.
GLG Japan CoreAlpha Top 10 Holdings (as at 31 October 2012) vs Topix top 10 holdings
| GLG Japan Core Alpha Holdings | % | Topix holdings | % |
|---|---|---|---|
| Sony Corporation | 7.09% | Toyota Motor Corp | 3.94% |
| Mitsubishi UFJ Financial Group | 5.95% | Mitsubishi UFJ Financial Group | 2.69% |
| Sumitomo Mitsui Financial Group | 5.33% | Honda Motor Co | 2.21 |
| Panasonic Corporation | 5.27% | Canon Inc | 1.87% |
| Nomura Holdings | 4.72% | Sumitomo Mitsui Financial Group | 1.86% |
| Nintendo Company | 4.51% | Mizuho Financial Group | 1.62% |
| Fujifilm Holdings Corporation | 4.49% | Nippon Telegraph & Telephone | 1.60% |
| Mizuho Financial Group | 4.00% | Takeda Pharmaceutical Co | 1.35% |
| Toyota Motor Corp | 3.93% | Fanuc Corp | 1.28% |
| Ricoh | 3.84% | SoftBank Corp | 1.26% |
Source: Investors Chronicle and Lyxor
iShares MSCI Japan (IJPN) Top 10 holdings (as at 7 December 2012)
| Holding | % |
|---|---|
| Toyota Motor Corp | 5.64% |
| Mitsubishi UFJ Financial Group | 2.82% |
| Honda Motor Company | 2.61% |
| Sumitomo Mitsui Financial Group | 2.11% |
| Canon Inc | 1.97% |
| Takeda Pharmaceutical Co | 1.75% |
| Mizuho Financial Group | 1.75% |
| Fanuc Corp | 1.59% |
| SoftBank Corp | 1.54% |
| Mitsubishi Corp | 1.27% |
Source: iShares
