Unearth cheap growth with Schroder Tokyo

"Japanese equities are my contrarian bet for 2013," says Darius McDermott, managing director at discount broker Chelsea Financial Services. "The market is looking attractive on valuations, with almost two-thirds of listed companies trading below book value. It's also prone to sharp rallies as it is leveraged to the global economy (many global multi-nationals are listed in Japan). If the state of the world improves, which I think it will, we could see a geared recovery play in the asset class."

Japanese equities trade at below book value, making them the cheapest in the world on a price-to-book and also a price-to-sales basis. It is possible to find a number of companies trading at less than the value of the cash on their balance sheet.

As well as bargain valuations, there are funds that beat the benchmark and many of their peers regardless of the political and economic situation. So if you invest in one of these, you should benefit from the ability of the manager, regardless of the market.

One such fund is Schroder Tokyo (GB0007650640), which independent financial adviser Informed Choice has added to its list of preferred funds for 2013. "The manager (Andrew Rose) has been in place for nearly nine years," says Martin Bamford, managing director at Informed Choice. "The fund size is £775m, which suggests it is sustainable in the longer term. Over the past few years, the fund has been less volatile than its benchmark."

The fund has beaten its benchmark, Tokyo Stock Exchange 1st Section Index (TOPIX), over one, three and five years, placing it among the top 10 performing Japan funds over three and five years.

Schroder Tokyo aims for capital appreciation through participation in the growth of the Japanese economy, in strong areas such as manufacturing (particularly those parts demonstrating an ability to exploit newly emerging technology), and via sectors benefiting from structural economic change.

The fund's investment team is focused on long-term value creation and strength of franchise to identify the fair value of stocks. They seek undervalued companies where the long-term growth prospects are not fully priced in, preferring ones that can generate and sustain above-average returns on capital. They also look for opportunities in turnaround situations where companies can improve returns from depressed levels.

Research recommendations drive portfolio construction, and the greater the level of conviction in a recommendation, the more closely it is reflected in the portfolio.

Although more than two-thirds of the fund is invested in large caps, it has benefited from its allocation to less well researched mid-cap stocks, which account for around 18 per cent of the fund.

Japan's economic problems will not be easily resolved as it has high debt, an ageing population and deflation among other things. The market has also experienced the so-called 'false dawns' for more than 20 years. But certain companies are successful regardless of economic problems and are at low valuations, and Schroder Tokyo has been successful in identifying them. So if you are minded to take a punt on Japan, this fund is a buy.

Source: Morningstar & *Schroders

Source: Morningstar as at 14 December 2012

Top 10 holdings as at 31 October 2012

Sector breakdown