Play the Japanese growth story with Legg Mason IF Japan Equity

However, there are still good long-term gains to be made from investing in Japan. The country is shifting from a focus on manufacturing to being more service and consumer-orientated, and patient investors have an opportunity to capitalise on this.

One fund that can give investors access to this growth is Legg Mason IF Japan Equity (GB00B8JYLC77). The fund is managed by Tokyo-based Hideo Shiozumi through his company, Shiozumi Asset Management.

Mr Shiozumi, who has been investing in Japanese equities since 1970 and is supported by three analysts, aims to capitalise on changes in the economy. He seeks to identify key themes in the Japanese economy, such as its ageing population and the internet’s influence on consumption habits, with the team then conducting detailed analysis on around 100 companies.

The manager focuses on smaller, high-growth companies, with a preference for those that have grown significantly already but look capable of continuing to do so for at least two years.

The fund typically holds between 25 and 60 companies, with initial position sizes of 1 to 3 per cent, leaving potential for the fund to hold more of a company if it outperforms.

The top 10 usually account for around half of the portfolio, and at the end of July they made up 55.20 per cent of assets. The top holding, PeptiDream, a biopharmaceutical company, accounted for 9.52 per cent alone. The vast majority of the portfolio is held in core, longer-term holdings and its largest sector exposure is to industrials.

Historically, this strategy has worked exceptionally well. The fund has returned 49.47 per cent, 176.66 per cent and 674.76 per cent over three, five and 10 years, respectively. By comparison, the Topix index returned just 25.05 per cent, 71.98 per cent and 135.96 per cent over the same periods. Legg Mason IF Japan Equity has also more than doubled the return of the average fund in the Investment Association Japan sector over each of these timeframes.

Although Mr Shiozumi’s main focus is on growth, he remains mindful of prices, monitoring the ratio of the stock’s price/earnings to its growth, or PEG ratio. This helps him determine the relative trade-off between the price of a stock, the earnings generated per share, and the company's expected growth.

However, the fund can be highly volatile due to its bias towards smaller companies. It also remains highly dependent on their ability to deliver on growth expectations and on the market’s sentiment towards them.

But these risks are mitigated by Mr Shiozumi’s superior stockpicking, as well as a focus on growing industries. Much of the fund, for example, is invested in service, retail and wholesale stocks that are benefiting from consumers' increasing use of the internet. The fund also had 27.51 per cent – the second-largest sector exposure – invested in healthcare at the end of July, which could benefit from Japan’s ageing population. Investors prepared to tolerate the innate share price volatility of such companies have generally been rewarded by strong performance in the end.

So if you have a long-term investment horizon and a big appetite for risk, this fund can reap rewards. Buy. ZB.

Set up date 8/10/96*    More details: leggmason.com    
Manager start date 22-Oct-96            
Source: Morningstar as at 21 August 2019, *Legg Mason   

Performance

Source: FE Analytics as at 21 August 2019 

Top 10 holdings

Source: Legg Mason as at 31 July 2019          

Sector breakdown (%)

Source: Legg Mason as at 31 June 2019