UK investors have been wary about investing in Japan after years of poor returns in the last century. But the world has changed, and good Japanese companies and funds have been making strong returns in recent years, and have the potential to keep doing so. So a good Japan fund should be a useful part of the developed markets growth portion of many investors’ portfolios and, at least in the near future, a hunting ground for value investors.
NEW ENTRANT: Lindsell Train Japanese Equity (IE00B7FGDC41)
David Liddell, chief executive of IpsoFacto Investor, suggested adding Lindsell Train Japanese Equity. This fund aims to increase the value of its assets over the longer term, and is concentrated, with typically only 20 to 35 holdings. The fund’s manager, Michael Lindsell, does not often add or dispose of holdings, meaning that trading costs eat less into returns. This is typical of the approach taken by this asset management company.
Mr Lindsell invests in companies with sustainable business models, and/or established brands. He particularly likes them to have long-term durability in cash and profit generation. This tends to lead Lindsell Train Japanese Equity and other Lindsell Train funds to consumer branded goods, internet, media, software, pharmaceuticals and financials companies. At the end of July, Lindsell Train Japanese Equity had 45 per cent of its assets in consumer franchises, and a quarter in media and software companies.
The fund has made outstanding returns, particularly over the longer term, putting it well ahead of the Topix index and Investment Association (IA) Japan sector average.
Mr Lindsell co-founded Lindsell Train in 2000 alongside Nick Train, and is co-manager of Lindsell Train Global Equity Fund (IE00BJSPMJ28). He has over 30 years experience in investment management. This includes seven years at GT Management as chief investment officer in the Tokyo office, and responsibility for this company’s global and international funds when based in London
Baillie Gifford Japan Trust (BGFD)
Baillie Gifford Japan Trust aims for growth over the long term by investing principally in medium to smaller-sized Japanese companies. The fund’s manager, Matthew Brett, and deputy manager, Praveen Kumar, pick stocks on the basis of their own merits so that sector allocation is a consequence of the attractiveness of individual stocks rather than top-down macro views. They believe that growth may come from innovative business models, disrupting traditional Japanese practices or market opportunities such as overseas growth.
They aim to identify businesses with attractive industry backgrounds, strong competitive positions within their industries, high-quality earnings and favourable attitudes towards shareholders. They analyse financial factors including earnings growth, cash generation, profitability, returns on capital and balance sheet strength.
They look to invest in stocks for three to five years as they believe that being patient pays off because the market tends to undervalue sustainable earnings and cash flow growth. They get investment ideas from sources including company meetings, investment trips, external research and industry experts, and draw on research from other teams within Baillie Gifford.
The funds’ managers follow a list of around 350 companies that potentially meet more than one of four requirements: a positive industry background, durable competitive advantage, strong financial characteristics and management attitude aligned with the interests of shareholders.
“This trust’s extreme growth tilt leaves performance vulnerable to a rotation towards value stocks,” says Rob Morgan, pensions and investment analyst at Charles Stanley. “However, for investors prepared to share its managers’ long-term philosophy, Baillie Gifford Japan Trust represents a solid choice for Japanese equity investment.”
The trust’s approach has worked well over the years and it has made strong returns. Much of this was under the management of Sarah Whitley, who ran it between 1991 and the end of April 2018. Since then it has been run by Mr Brett and Mr Kumar, experienced investors with longer-term track records of running other funds. However, Baillie Gifford funds are run very much via a team approach. So a Baillie Gifford fund’s investment process is unlikely to change much following a manager departure – as has been the case here.
The trust has an ongoing charge of 0.7 per cent, which is reasonable for an active fund.
Legg Mason IF Japan Equity (GB00B8JYLC77)
Legg Mason IF Japan Equity’s manager, Hideo Shiozumi, invests in companies on the basis of their own merits. He looks to invest in high-growth companies with annual earnings growth in excess of 20 per cent, which he thinks are attractively valued.
He also has a thematic bias driven by Japan’s economic position. He thinks that Japan is in the process of moving from being a regulated to a deregulated economy, and from a manufacturing to a service-orientated economy. So he seeks to exploit the investment opportunities that this throws up.
The fund is focused on domestic-oriented sectors that Mr Shiozumi and his team believe will be major beneficiaries from work-style reforms. These include medical and nursing care services, consumer lifestyle, and internet-enabled companies. He also believes that the coronavirus pandemic’s spread has affected Japan’s way of living, and accelerated its digital transformation of social and infrastructure situations. So teleworking, e-commerce and online medical services should remain major themes in the Japanese equity market.
Legg Mason IF Japan Equity has a good record of consistently outperforming the Topix index and IA Japan sector average. This has added up to outstanding cumulative total returns, particularly over longer time periods, making it one of the best performing of all Japan funds.
However, the fund has exposure to smaller companies and is highly concentrated – its 10 largest positions accounted for 58.72 per cent of its holdings at the end of July. This increases the fund’s risk and potential for volatility, so it is an option for growth investors with a higher risk appetite. If you invest in any type of equity fund you should have a long-term investment horizon, but this is particularly the case with higher-risk, higher-return funds such as this one.
Baillie Gifford Japanese Smaller Companies (GB0006014921)
Baillie Gifford Japanese Smaller Companies invests in companies its managers think are attractively valued and offer good growth opportunities. They believe growth may come from innovative business models, disrupting traditional Japanese business practises or market opportunities such as growth from outside Japan. The fund follows a similar investment process to Baillie Gifford’s other Japan growth funds, such as Baillie Gifford Japan Trust (see left), and has been run by Praveen Kumar since December 2015. He is also deputy manager of Baillie Gifford Japan Trust.
“This fund has a buy-and-hold approach, with the managers willing to ride out short-term share price movements to take long-term benefits from the best growth prospects,” say analysts at FundCalibre. “Baillie Gifford Japanese Smaller Companies can invest in a broad range of sectors, with the managers looking specifically for innovative names that have the potential to be future industry leaders.”
This investment approach has resulted in strong returns and the fund was well ahead of the MSCI Japan Small Cap index and the IA Japanese Smaller Companies fund sector average over one, three and five years at the end of July.
Its ongoing charge of 0.62 per cent is relatively low, especially in view of its strong performance.
Man GLG Japan CoreAlpha (GB00B0119B50)
If you want exposure to Japan equities via a fund with a value investment style this fund is a good option. Man GLG Japan CoreAlpha is run via a contrarian and value approach, and like a lot of funds that do this its recent returns have not been good, so its cumulative numbers look very poor. However, prior to 2017 the fund made some very strong returns and – at least until now – its performance 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 Rob Morgan. “Investors [in this fund] need to be patient, share its investment 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 Japanese equities since 1984 and created the strategy via which this fund is run in 2006. He and his colleagues believe that 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.
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | Ongoing charge plus any performance fee (%) | Morningstar Sustainability Rating |
| Baillie Gifford Japan Trust share price | 6.2 | 22.3 | 94.9 | 0.7* | |
| Lindsell Train Japanese Equity | 3.1 | 20.6 | 93.7 | 0.71 | Below Average |
| Man GLG Japan CoreAlpha | (16.7) | (17.5) | 14.5 | 0.90 | Below Average |
| Legg Mason IF Japan Equity | 16.3 | 42.2 | 171.1 | 0.85 | Average |
| Baillie Gifford Japanese Smaller Companies | 9.1 | 31.4 | 133.2 | 0.62 | Low |
| MSCI Japan Small Cap index | (3.7) | 0.7 | 61.4 | ||
| Topix index | (0.1) | 7.2 | 54.7 |
Source: Morningstar, *AIC.
Performance data as at 31 August 2020.
**Data shown is for a different share class to the one indicated in the text
For all our selections across various sectors, see below:
Global equity income (4 funds)
Overseas equity income (6 funds)
Specialist equity funds (9 funds)
