Last week we reported that investors who have held sterling hedged share classes of Japan funds over the last couple of years are likely to have done much better than those who didn't, and that this is expected to continue as the Bank of Japan's quantitative easing programme could put further pressure on the currency.
We already include a fund with a Sterling hedged share class in our IC Top 100 Funds - GLG Japan Core Alpha Equity D H GBP (IE00B665M716) - which has been outperforming its unhedged share classes. If you want to add to your hedged Japan exposure you might want to consider Aberdeen Japan Investment Trust (AJIT).
- Partial currency hedge
- Good performance
- Experienced managers
- Good outlook for Japan equities
- Discount tight relative to history
- Currency calls can go wrong
IC TIP RATING
Tip style: GROWTH
Risk rating: HIGH
Timescale: LONG TERM
This investment trust has a partial currency hedge - currently just under half the portfolio net assets are hedged through forward contracts. The trust's manager and board set the levels of the hedge periodically to reflect the perceived net exposure to yen risk not already mitigated by the proportion of revenues and earnings derived from outside Japan by its portfolio holdings. Since last October when this trust changed its objective from investing across Asia to only investing in Japan, it has benefited from the partial currency hedge with a return of 26 per cent in contrast to 4 per cent for the Topix in sterling terms, and about 20 per cent for the fully hedged benchmark, according to Charles Tan, investment companies analyst at Cantor Fitzgerald.
The trust, formerly known as Aberdeen All Asia Investment Trust, also beat all of its Association of Investment Companies (AIC) Japan sector peers over one year.
"Aberdeen Japan provides sterling-based investors with a thoughtful way of accessing Japanese equities, combining Aberdeen's regional investment prowess with a smart currency hedge that represents a good balance of risk and reward in light of Japan's stimulus policies," adds Mr Tan.
The trust is run by Aberdeen's Japan equities team led by Kwok Chern-Yeh. The team also runs open-ended funds and has a strong track record with Aberdeen Japan Equity (GB0004521620) which is among the top few performing funds in the Investment Management Association (IMA) Japan sector over one, three and five years.
The fund invests along the lines of Aberdeen's investment process which focuses on choosing companies according to their individual merits, and places an emphasis on growth at reasonable valuations. The trust's managers take a team approach to managing it which reduces the risk of fund manager departure.
Analysts and advisers are enthusiastic on Japanese equities for a number of reasons. These include a large increase in allocation to them by the Japanese government pension fund, a delay to a rise in Japan's consumption tax, cheap valuations relative to some other developed markets and ongoing monetary stimulus which could help push up asset prices.
The trust's board expects that the dividend for the 2015 financial year will be significantly lower because it will reflect the lower level of dividend yield in Japan, so this is not a good option for income seekers.
Fund mangers can get currency calls wrong which is detrimental to returns, though over the last year Aberdeen Japan's team have done well on this.
On Tuesday 2 December the trust was trading at a discount of 4.27 per cent, in contrast with its 12 month average discount of 9.46 per cent.
However, if Aberdeen Japan continues to do well the discount could tighten further: successful Japan investment trusts such as IC Top 100 Fund Baillie Gifford Japan (BGFD) sometimes trade on premiums. So with the potential for good returns and discount tightening, and a good track record on currency hedging, Aberdeen Japan Investment Trust looks like a good way to play this market. Buy.
ABERDEEN JAPAN INVESTMENT TRUST (AJIT) | |||
| PRICE | 443.99p | GEARING | 5% |
| AIC SECTOR | Japan | NAV | 458.6p |
| FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 4.27% |
| MARKET CAP | £64.64m | YIELD | 1.02% |
| No OF HOLDINGS | 39* | ONGOING CHARGE | 1.38% |
| SET UP DATE | October 1998* | MORE DETAILS | www.aberdeenjapan.co.uk |
Source: Morningstar, *Aberdeen
Performance
| 6-month share price return (%) | 1-year share price return (%) | 3-year cumulative share price return (%) | |
| Aberdeen Japan Ord | 33.8 | 26.2 | 76.8 |
| Topix TR JPY | 8.7 | 3.1 | 35.4 |
| AIC Japan sector Average | 17.3 | 7.2 | 73.2 |
Source: Morningstar as at 30 November 2014
TOP 10 HOLDINGS as at 31 October 2014 (%)
| Holding | % |
| Shin-Etsu Chemical | 5.3 |
| Keyence | 4.7 |
| FANUC | 4.6 |
| Japan Tobacco | 4.4 |
| Nabtesco | 4.1 |
| Seven & i | 3.8 |
| Canon | 3.7 |
| Chugai Pharmaceutical | 3.2 |
| East Japan Railway | 3.2 |
| Toyota Motor | 3.1 |
Sector breakdown (%)
| Sector | % |
| Consumer goods | 29.5 |
| Industrials | 20.8 |
| Consumer Services | 11.4 |
| Healthcare | 9.5 |
| Basic Materials | 9.5 |
| Financials | 8.3 |
| Technology | 5.4 |
| Telecommunications | 3.1 |
| Cash | 2.5 |
