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Japan Funds Best Performing Trusts Over 3 Years

Japan has proved a savvy investment for closed-end fund shareholders over the past three years. And now the economy has started to pick up too

Karen Kwok 2 March, 2017 | 1:52PM

Japan’s economy may not be doing as well as expected – but that is actually good news for investors. Much like a weak pound has proved positive for the FTSE 100, a weak yen boosts the Japanese stock market. Japan’s economy grew at rate of 1% in the final three months of 2016, down from 1.4% in the previous quarter, and lower than expectations. But currency weakness stimulated growth in exports and business investment, the government revealed.

A weaker yen makes Japanese goods more attractive to overseas buyers and improves repatriated earnings. Exports rose 2.6% in the fourth quarter, compared with a 2.1% increase in the previous quarter, as the US dollar rose against the yen following the victory of Donald Trump in the US presidential election in November.

“Japan’s most important export market is the US, where ongoing wage increases, employment growth and higher consumer confidence should help to drive the current momentum in export demand,” said Naoki Kamiyama, chief strategist with Nikko Asset Management. 

The February data from IHS Markit showed that Nikkei Flash Manufacturing Purchasing Managers’ Index, which measures Japan’s manufacturing activity, rose to 53.3 from 52.7 in January. This growth is at the quickest pace in nearly three years.

“Japan’s earnings are particularly impressive. The December quarter pre-tax profits rose 11% on the year to the highest level in a decade. But investors are just warming up to Japanese equities. Our analysis shows few signs of overly bullish positions on Japanese and European equities, suggesting there is more room for investors to step in,” said Richard Turnill, global chief investment strategist with Blackrock.

Japan’s less uncertain market looks compelling opportunity for investors when compared to the political risks in Europe, Nikko Asset Management said in a published note. Given Japan’s dependence on the US, its largest economic partner, Nikko added that Japan stands to benefit most from the policies to be implemented by US President Donald Trump.

Japanese Closed-end Funds Gained in 2016

Japan bulls have made great gains closed-end funds, data from Morningstar Direct showed. The best performing investment trusts over the past three years have been ones with exposure to Japanese stocks.

The standout performer is the Gold Rated Baillie Gifford Japan trust (BGFD), run by Sarah Whitley who has 36 years investment experience with Baillie Gifford. This allows her a tremendous perspective on various market cycles and developments, said David Holder, Morningstar senior fund analysts. This trust has a 22.4% three year annualised return and a 21.8% five year annualised return. It gained 23% in 2016.

Holder said the disciplined investment approach of this trust is multi-cap, fundamentally focused, and long-term in nature. The fees here are in line with the broader options available to investors seeking exposure to Japanese equities, said Holder. The latest ongoing charge for 2016 was 0.88% and the trust is trading at a 2.3% premium.

Comparatively, Schroder Japan Growth (SJG), Gold Rated by Morningstar analysts, may offer a more attractive investment opportunity as the fund is trading at a 8.2% discount. It also delivered long term gains with a 16.3% three year annualised return and a 20.4% five year annualised return. The trust gained 22.9% in 2016.

The trust’s manager Andrew Rose has run Japanese equity portfolios since the 1980s and is one of the most experienced equity managers in the peer group, said Peter Brunt, Morningstar senior fund analyst. Rose is supported by a strong team of analysts and portfolio managers based in Tokyo, and he has a forward-looking view. Brunt said Rose prefers companies which he believes have the potential to surprise on the upside over a two- to three-year period but where the market has taken a short-term negative view. 

JP Morgan Japanese (JFJ) has also gained money on a long term view and it is trading at 10.8% discount. The fund has 18.2% three-year annualised returns and 16.5% five years annualised returns. It gained 15.3% in 2016. The trust holds a Neutral Rating from Morningstar analysts because of disappointing performance in years 2007 to 2012.

The fund manager Nicholas Weindling brings solid experience in Japanese equities, having spent time at Baillie Gifford prior to joining JPMorgan in 2006, since which time he’s been based in Tokyo, said Holder.

The fund benefits from a very straightforward fee structure and most importantly it is also very competitive. The ongoing charge in 2016 is 0.74%.

Holder takes comfort in the recent improved performance and the fund manager Weindling’s adherence to the long-established investment approach, but wait to see if this is mean-reverting or if he can demonstrate more persistent outperformance in the future.

Investment Trust With Broader Asia Exposure

For investors who wish to invest in Japan under a more diversified approach, Bronze Rated Witan Pacific (WPC) invests in the broader Asia-Pacific region. Holder thinks there is merit in this vehicle providing a one-stop shop for an investor keen to invest through the region and subcontract the geographic allocation to regional experts.

The trust has 14.2% three-year annualised returns and 9.5% five-year annualised returns. It gained 22.8% in 2016. The trust is trading at 14.5% discount and arguably, the trust suffers from being the only UK listed investment trust of its type, with investor demand for these strategies less certain than that for Asia excluding-Japan strategies, said Holder.

Japanese Small-Cap Funds Also Deliver Gains

Investment trusts investing in Japan small and mid-cap equity delivered gains on a long-term view as well, although are not rated by Morningstar analysts. Fidelity Japanese Values (FJV), JP Morgan Japan Smaller (JPS), Baillie Gifford Shin Nippon (BGS) all deliver double-digit annualised gains over three year and five years. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Baillie Gifford Japan Ord624.00 GBX0.40
Baillie Gifford Shin Nippon Ord634.00 GBX0.79
Fidelity Japanese Values Ord107.25 GBX0.70
JPMorgan Japan Smaller Cos Ord322.50 GBX-0.92
JPMorgan Japanese Ord337.13 GBX0.04
Schroder Japan Growth Ord188.25 GBX-0.66
Witan Pacific Ord309.75 GBX0.24
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk