Top 100 Funds 2019: Japan

Baillie Gifford Japan Trust (BGFD)

Baillie Gifford Japan Trust has made outstanding returns for many years, but this was under the management of Sarah Whitley, who ran it between 1991 and the end of April 2018. Since then, Matthew Brett has been lead manager with Praveen Kumar as deputy manager.

Baillie Gifford funds are run very much via a team approach, with investment ideas generated from a number of sources including other areas of the company. This means the process via which a fund is run is unlikely to change much following a manager departure.

Mr Brett is an experienced member of Baillie Gifford’s Japan team. He joined the company in 2003, and between June 2008 and April 2018 was co-manager of Baillie Gifford Japanese Fund (GB0006011133) alongside Ms Whitley, and is now its sole manager. He also attended Baillie Gifford Japan Trust’s board meetings prior to becoming its manager and he is co-manager of Baillie Gifford Japanese Income Growth (GB00BYZJQG71).

Praveen Kumar became deputy manager of Baillie Gifford Japan Trust at the end of April 2018. He joined Baillie Gifford in 2008 and its Japanese equities team as an investment manager in 2011. He took over management of Baillie Gifford Japanese Smaller Companies (GB0006014921) and Baillie Gifford Shin Nippon (BGS) in December 2015.

Over one year the trust has underperformed the Topix index, but this was partly due to its exposure to cyclical companies last year.

“It was not surprising to see a period of underperformance during the volatile markets in the fourth quarter of 2018, given the [trust’s] focus on mid-cap growth stocks,” comment analysts at Numis Securities.

And so far this year performance has bounced back, with the trust well ahead of the Topix index.

On 1 January this year, the trust cut the management fee on its first £50m of assets from 0.95 per cent to 0.75 per cent. This could reduce its already relatively low ongoing charge of 0.73 per cent.

Man GLG Japan CoreAlpha (GB00B0119B50)

Man GLG Japan CoreAlpha underperformed the Topix index in 2017 and 2018, and so far this year. This is partly due to its contrarian and value approach, which means it can go through periods of underperformance and volatility. But – at least until now – it has always bounced back, resulting in strong long-term total returns.

“I like the consistently applied approach and absence of any style drift from this highly experienced fund management team,” says Mr Morgan. “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 and created the strategy via which this fund is run in 2006.

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. They have a bias to larger companies.

LF Morant Wright Nippon Yield (GB00B42MKS95)

LF Morant Wright Nippon Yield is an income fund but has historically also made good total returns. Its one-, three- and five-year cumulative total returns do not look good at the moment, but this is largely due to underperformance in 2018 and so far this year. It beat the Topix index and IA Japan sector average in nearly every calendar year between 2009 and 2017, and while it underperformed in 2013 it still made a double-digit return of 19 per cent. 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 Stephen Morant and Ian Wright. They are value investors who look to preserve capital and generate absolute returns, and the fund has made positive returns in nine out of the past 10 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.

The fund’s defensive profile means it can lag strongly rising markets such as in 2013 and year-to-date 2019.

Legg Mason IF Japan Equity (GB00B8JYLC77)

Legg Mason IF Japan Equity has an outstanding performance record and is among the top-five Japan funds in terms of performance over one, three, five and 10 years. However, it can be highly volatile over short-term periods. So, although its long-term cumulative 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, seeks to exploit structural changes in Japan. He aims to to identify high-growth companies with annual earnings growth in excess of 20 per cent, but which he thinks are attractively valued. He prefers to invest in smaller, Japan-focused companies that he thinks will be major beneficiaries from work-style reforms. These include medical and nursing care services, outsourcing business and e-commerce.

He takes large bets on a small number of stocks and the fund’s top 10 holdings account for over 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 partly due to a previous manager, John MacDougall. Praveen Kumar started running the fund in December 2015. However, the fund has continued to do well under his management and is ahead of MSCI Japan Small Cap index and the IA Japanese Smaller Companies sector average over one and three years.

The fund appointed a co-manager, Felicia Hjertman, at the start of 2017, but she left in April this year. And Mr Kumar’s workload has increased because he has also been deputy manager of Baillie Gifford Japan Trust since 30 April 2018.

But Baillie Gifford funds are run via a team approach, so a fund’s investment strategy does not change when a manager leaves. The company also has a large Japan equities team, so Mr Kumar remains well supported. And, so far, the fund’s performance suggests that Mr Kumar’s increased responsibilities are not a problem.

Mr Kumar and his team 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 0.62 per cent.