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Buy into an attractive investment landscape with AXA Framlington Japan

AXA Framlington Japan looks like a good way to capture Japan's potential
November 23, 2017

The investment backdrop in Japan is looking good: core inflation has been positive since the summer of 2015, while unemployment continues to fall and business sentiment remains positive, suggesting confidence in future growth. Japanese companies, meanwhile, increased earnings by 17 per cent in the latest quarter – the best year-on-year increase of any major developed market – and Richard Turnill, global chief investment strategist at BlackRock, thinks momentum is poised to carry over into 2018.

IC TIP: Buy at 269.2p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Good total returns

Strong manager record

All-cap investment approach

Domestic exposure

Bear points

Japan equities have been cheaper

Part of the reason for what seems like a good investment environment are the fiscal and monetary policies that prime minister Shinzo Abe has been pursuing for the last few years, after winning the election in 2012. And last month his coalition won another decisive victory which Monique Wong, multi-asset investment manager at private bank Coutts, believes has "cemented continuity in fiscal and monetary policy. The economic environment is favourable and showing sturdy growth, and inflation – while still not near the country's 2 per cent target – is positive and heading in the right direction. We continue to see Japan as an under-appreciated market. We see a strong earnings outlook and attractive valuations compared to other developed markets."

A good way to tap into Japan's potential could be AXA Framlington Japan Fund (GB00B7FSWP64). This has already delivered good returns and is among the 10 best performers in the Investment Association (IA) Japan sector over one, three and five years, over which periods it also beats indices such as the Topix and FTSE Japan.

The fund aims for growth by investing in companies of all sizes, although has an emphasis on small and mid caps which are typically more exposed to the domestic economy. Companies with a market cap of less than $2.5bn (£1.89bn) accounted for 38.7 per cent of the fund's assets at the end of October, and those with a market cap of between $2.5bn and $10bn accounted for 26.2 per cent. Although smaller companies can be higher risk this is mitigated as the fund is well diversified with typically 100 holdings.

AXA Framlington Japan's manager Chisako Hardie looks for companies she thinks have the potential for above-average profitability and growth, proven managements, strong balance sheets and attractive valuations. She selects shares by considering both macroeconomic factors and companies' individual attributes. And as well as using research from external brokers, she does her own research because of poor coverage of small-cap companies. This includes around 200 company meetings a year, analysis of price-earnings (PE) ratio multiples of potential investments and their peer group, and discounted cash-flow modelling.

Ms Hardie has worked at AXA Framlington since 2006 and has 26 years investment experience. "Over a long track record, the manager has outperformed the peer group more often than not," say analysts at research company FE. "Good stock-picking has had a material positive impact on results, which have tended to be relatively better in a rising market."

This could be beneficial if Japanese markets continue their good run.

Japanese markets have risen following Mr Abe's election victory so are not as cheap as they were, and there is no guarantee they will continue to rise.

However, Japan's stock markets are still considerably lower than the levels they were at in the late 1980s. And AXA Framlington Japan does not track an index but rather has a carefully chosen basket of companies.

So if you are looking to take advantage of what looks like a good investment landscape via a fund and manager that have already proven their ability to deliver growth, AXA Framlington Japan seems like a good way to get it. Buy.

AXA FRAMLINGTON JAPAN FUND (GB00B7FSWP64) 
PRICE269.2pMEAN RETURN24.96%
IA SECTORJapanSHARPE RATIO1.79
FUND TYPE Unit trustSTANDARD DEVIATION12.35%
FUND SIZE£224.17mONGOING CHARGE0.85%
No OF HOLDINGS96*YIELD0.41%
SET-UP DATE29/02/1984*MORE DETAILSaxa-im.co.uk
MANAGER START DATE16/04/2010  

Source: Morningstar & AXA Investment Managers

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
AXA Framlington Japan21.5496.19182.47
IA Japan sector average17.0668.14122.79
FTSE Japan TR GBP15.2465.77123.19
Topix TR JPY16.1568.92125.69
Source Morningstar, as at 17/11/2017
Top 10 holdings as at 31 October 2017 (%)
Outsourcing1.83
GMO Payment Gateway1.44
Softbank1.44
Wacom1.43
Shima Seiki Manufacturing1.42
Macromill1.36
Daifuku1.36
Sony1.34
Nihon M&A Center1.25
Yamashin-Filter1.25
Source: AXA Investment Managers
Sector breakdown, as at 31 October 2017 (%)
Industrials29.63
Consumer goods13.65
Healthcare13.51
Consumer services11.74
Financials11.62
Technology11.16
Basic materials3.93
Cash2.43
Telecommunications1.44
Utilities0.88
Source: AXA Investment Managers