Tap into Japan's relative value with Baillie Gifford Japanese

Japan’s economic growth, meanwhile, looks consistent at 1 per cent last year, with 1.5 per cent and 1 per cent forecast for this and next year, respectively. "While other central banks are talking about withdrawing monetary stimulus, the Bank of Japan is on a divergent policy path and is committed to maintaining an expansionary stance," say analysts at wealth manager Whitechurch Securities. "This should maintain the yen's weakness, which would further support the export-led Japanese economy."

And an increased focus on shareholder returns and better corporate governance, for example paying dividends and increasing the number of independent directors on boards, is creating a more positive environment for international investors, according to analysts at asset manager Rathbones, who add: "We believe Japan remains an interesting investment story for the long term, providing a degree of diversification from other developed markets."

A good way to access Japanese equities could be Baillie Gifford Japanese Fund (GB0006011133), which has beaten the Topix index over one, three and five years. It is also the second best performer out of more than 50 in the Investment Association (IA) Japan sector over five years, and among the top 10 performers over one and three years.

The fund aims for above-average long-term performance, and its managers favour high-quality companies capable of delivering attractive and sustainable earnings growth, and look to invest in leading global businesses that trade on a substantial discount to their peers.

They focus on growth companies that satisfy more than one of the following requirements: positive industry background, competitive advantage, favourable attitudes towards shareholders, and strong financials including earnings growth, balance sheet strength and returns on capital.

The fund is run by Sarah Whitley who has been in the Baillie Gifford Japan team since 1982, alongside Matthew Brett, who has co-managed the fund since 2008.

"Baillie Gifford has a very strong Japanese equity team," say analysts at research company FundCalibre. "This portfolio has delivered outstanding returns in the most difficult market conditions. Investing in Japan always carries high risk, although its stock market movements are often less correlated to western equity markets so can act as a diversifier. The emphasis on structural change within the portfolio should benefit from the government's current economic strategy."

Baillie Gifford Japanese has a relatively low ongoing charge for an active equities fund of only 0.68 per cent, making it one of the cheapest as well as best-performing Japan funds. And its low portfolio turnover rate of 5 per cent means that trading costs eat less into returns.

Baillie Gifford's Japan funds tend to have a growth-focused investment style, so if markets become more value-orientated their performance could suffer.

Japanese equities have enjoyed a relatively encouraging first half of the year so their valuations are not as cheap as they were. And despite steady growth the economic recovery is fragile, while Japan is a cyclically sensitive economy so could be negatively affected if global growth slows.

But analysts at Whitechurch say: "Valuations are also not stretched compared to other developed markets. And current dividend policy reform, the ability to return cash to shareholders and scope to improve return on equity make Japanese equities a relatively attractive investment case to diversify global equity exposure."

This fund has also delivered strong long-term returns regardless of regardless of economic conditions and short-term investment trends.So if you have a high risk appetite and long-term investment horizon, and are looking for developed markets growth at what looks like reasonable valuations, Baillie Gifford Japanese Fund still looks like a good option. BUY.