Top 100 Funds: Japan (5 Funds)

FUND DROPPED: Schroder Tokyo (GB00BGP6BR86).

Over the past five years this fund’s performance has been patchy and it has only beaten the Topix index in two out of the past five calendar years. The fund is run by experienced manager Andrew Rose, who has made good returns in the past and could return to form. However, there are many other Japan funds available that are doing better and it has now been a few years since this fund has performed well.

Baillie Gifford Japan Trust (BGFD)

Baillie Gifford Japan Trust made outstanding returns for many years under the management of Sarah Whitley, who had run it since 1991, and was head of Japanese equities at Baillie Gifford. However, she retired at the end of April, and now Matthew Brett is lead manager and Praveen Kumar is deputy manager.

While Ms Whitley’s retirement is not good news, it doesn’t mean the trust can’t continue to produce good returns. Mr Brett is fairly experienced: he joined Baillie Gifford in 2003 and since June 2008 has been co-manager of Baillie Gifford Japanese Fund (GB0006011133) alongside Ms Whitley, and has attended Baillie Gifford Japan Trust’s board meetings. He is also co-manager of Baillie Gifford Japanese Income Growth (GB00BYZJQG71) and part of the investment team that runs Baillie Gifford Global Select (GB00BYNK7G95).

Mr Kumar joined Baillie Gifford in 2008 and joined the Japanese Equities Team as an investment manager in 2011. He took over the management of Baillie Gifford Shin Nippon (BGS) and Baillie Gifford Japanese Smaller Companies (GB0006014921) in December 2015.

Baillie Gifford says its funds are run very much via a team approach rather than relying on one manager, with investment ideas generated from a number of sources including other areas of the company. This means the process via which the trust is run is unlikely to change much. 

“Change of manager needs to be monitored but doesn’t strike me as cause for concern,” says Rob Morgan at Charles Stanley. “Baillie Gifford Japan Trust’s extreme growth tilt leaves performance vulnerable to a rotation towards value stocks, the likes of which occurred in the latter half of 2016. However, for investors prepared to share the team’s long-term philosophy this represents a solid choice for Japanese equity investment.”

The trust can at times trade on a relatively high premium to NAV, so if you want to invest look out for when it is on a lower premium or discount – as long as this is not the result of a serious problem.

Man GLG Japan CoreAlpha (GB00B0119B50)

Man GLG Japan CoreAlpha has recently underperformed, in part due to its contrarian and value approach, which means it can go through periods of underperformance. But – at least until now – it has always bounced back, resulting in strong long-term returns.

“I like the consistently applied approach and absence of any style drift from this highly experienced management team,” says Rob Morgan at Charles Stanley. “Investors need to be patient, share the team’s long-term philosophy and be prepared to ride out the inevitable periods of volatility.”

The fund’s investment team is led by Stephen Harker, who has covered Japan equities since 1984. The team believes cyclicality strongly influences every sector of the Japanese market and that outperformance can be generated by exploiting extremes of valuation. They buy stocks that are completely unloved and sell them when they become popular after significant price appreciation.

When selecting shares they judge the quality of businesses, assessing what has been achieved historically and what can potentially be determined about the future from the prevailing environment.

LF Morant Wright Nippon Yield (GB00B42MKS95)

LF Morant Wright Nippon Yield is an income fund but also makes good total returns, and is in the first quartile of the IA Japan sector over three and five years – ahead of many funds with a growth objective. It is also ahead of the Topix index in six out of the past seven years so, if you hold the accumulation share class, it could be a good option for Japanese equity growth.

The fund is managed by a team of six that includes Morant Wright founders Ian Morant and Stephen Wright. They are value investors who look to preserve capital and generate absolute returns, and the fund has made positive returns in each of the past seven calendar years. They aim to invest in undervalued Japanese companies with strong balance sheets and sound business franchises, whose share prices offer potential for significant appreciation over the longer term without undue risk.

But the fund’s defensive profile means it could lag strongly rising markets such as happened in 2013.

Legg Mason IF Japan Equity (GB00B8JYLC77)

Legg Mason IF Japan Equity has an outstanding performance record and is among the top-performing Japan funds over one, three, five and 10 years. However, it can be highly volatile. For example, over the first six months of 2016 the fund rose 48 per cent but in the second half fell 12 per cent.

So although its long-term total returns are very strong, it is only an option if you can invest for this kind of timescale, have a high risk appetite and include it as part of a diversified portfolio.

The fund’s manager, Hideo Shiozumi, prefers to invest in relatively smaller, Japan-focused companies, rather than the large global companies and exporters that feature prominently in many other Japan equity funds. He takes large bets on a small number of stocks and the fund’s top 10 holdings account for nearly half its assets – a reason why it can be volatile and high-risk, but also makes outstanding returns.

Baillie Gifford Japanese Smaller Companies (GB0006014921)

Baillie Gifford Japanese Smaller Companies has a strong long-term performance record, but this is largely due to a previous manager, John MacDougall. Praveen Kumar started running the fund in December 2015 and Felicia Hjertman came on board at the start of 2017.

The fund underperformed MSCI Japan Small Cap index in 2016, but was well ahead of this index in 2017 and over the first eight months of this year. And Baillie Gifford funds are run via a team approach so its investment process is similar to what it was under Mr MacDougall. The fund’s managers look to invest in attractively valued smaller companies that offer good growth from innovative business models disrupting traditional Japanese business practices, or growth outside Japan.

It also has a low ongoing charge of 0.63 per cent.

There is a question mark over what Baillie Gifford’s Japan funds will be able to do going ahead due to the recent departure of its head of Japan equities, Sarah Whitley (see Baillie Gifford Japan Trust). And Mr Kumar’s workload has increased because he has also been deputy manager of Baillie Gifford Japan Trust since 30 April. But as far as Baillie Gifford Japanese Smaller Companies is concerned, so far so good.