The yen is looking very strong against the pound at the moment, causing fund managers to urge UK investors to buy now if they're going to take the plunge.
They're the first to admit they have to be more selective when it comes to Japanese stocks, though. And most of the funds we like are increasingly turning their noses up at large companies, in favour of small- and medium-sized businesses.
This is because their performance is less tangled up with the sluggish growth of the wider economy, so they're more likely to thrive. John MacDougall, manager of the Baillie Gifford Japanese Smaller Companies Fund and Baillie Gifford Shin Nippon PLC fund, says he likes the young, entrepreneurial management style of small Japanese start-ups and medium-sized companies. "It's the antithesis of the stereotypical Japanese zombie mega-company being propped up by the state to save face."
Mr MacDougall has a keen eye for healthcare, e-commerce and robotics companies, all of which he believes will deliver the best returns to investors. It's no surprise then that these sectors feature heavily in his funds.
If you're looking for strong growth over a 12-month period, we think the Schroder Japan Growth Investment Trust, currently trading at a 13 per cent discount, looks like a decent bet. It's 6 per cent overweight in small-cap companies and invests using a multi-cap model to promote diversification. Its manager, Andrew Rose, remains upbeat about Japan's growth. "An ageing population is not unique - it's just that the Japanese got rich before they got old, whereas for most other countries it's the other way round," he says.
He's also confident that the labour market is on the verge of a boom as a result of currently low female participation rates, which should be set to increase in coming years.
His top stock picks are electronic parts companies. This is because they're cheap and don't have "messy" balance sheets like their western counterparts.
Among open-ended funds, GLG Japan Core Alpha delivers returns well above benchmark returns over a five-year period at a reasonable price, so is well worth considering. Although it has temporarily soft-closed to new investment, starting on 31 March 2012, it is still available via brokers such as Hargreaves Lansdown and Bestinvest. You may think the soft closure raises the risk of investing too high for your taste - if so there are plenty of other funds that have a five-year record of beating the Japan market (see table below).
| Open-ended Japan funds | Five-year (cumulative) return (%) | Five-year peer group rank |
|---|---|---|
| Neptune Japan Opportunities A | 43.06 | 1 |
| Legg Mason Japan Equity A | 37.84 | 2 |
| Aberdeen Japan Growth A | 19.38 | 3 |
| Aberdeen Global Japanese Equity D2 | 19.34 | 4 |
| GLG Japan Core Alpha Retail Acc | 18.71 | 5 |
| JOHCM Japan GBP | 17.17 | 6 |
| CF Morant Wright Japan A Acc | 16.59 | 7 |
| Fidelity Japan Smaller Companies Fund | 15.98 | 8 |
| M&G Japan A Inc | 13.21 | 9 |
| Baillie Gifford Japanese A | 12.12 | 10 |
| Schroder Tokyo Acc | 11.72 | 11 |
| CF Canlife Japanese Growth | 11.03 | 12 |
| Royal London Japan Growth A | 9.45 | 13 |
| Jupiter Japan Income Acc | 7.91 | 14 |
| Old Mutual Japanese Select | 6.58 | 15 |
| Number of investments ranked | 46 | |
| Peer group average | -0.54 | |
| S&P Topix Yen total return index £ | -2.55 | |
| FTSE All-Share total return index £ | 20.38 |
Notes: Figures as at 25 September 2012. Source: Morningstar
| Japan investment trusts | Five-year share price total return (%) | Discount/premium |
|---|---|---|
| Baillie Gifford Japan | 1.3 | -10 |
| JPMorgan Japanese | -18.2 | -15.7 |
| Schroder Japan Growth | -6.7 | -13.5 |
| Atlantis Japan Growth | -7 | -6.5 |
| Baillie Gifford Shin Nippon | 18.7 | -2 |
| Fidelity Japanese Values | -22.3 | -15.1 |
| JPMorgan Japan Smaller Companies | -30.1 | -15.1 |
| Prospect Japan | -43.4 | -20.4 |
Notes: Figures as at 25 September 2012. Source: Morningstar for Association of Investment Companies.
Also see: Be scrupulous before ditching Japan
