Japan fund managers are upbeat on the outlook for equities despite poor returns this year, according to Standard & Poor’s (S&P). In its Japan sector update, S&P found that managers are positive on valuations and Japan’s limited exposure to credit problems. Thames River Capital, however, has closed its Japan fund.
The results of the S&P survey, published last week, follow a disappointing quarter for Japan-focused portfolios. According to S&P, the median fund in the firm’s Japan mainstream equities sector fell 13.1% over the three months ending August 31, bringing the overall decline this year to 17.8%.
While the figures were disappointing in absolute terms, they also compared badly with the S&P Japan 500 index, which fell by 11% and 14.2% over the same time-frames. Small and mid-cap Japan funds also underperformed the S&P Japan SmallCap 250 index.
According to S&P, all the reviewed funds were hit by overweight positions in cyclicals and underweights in defensive stocks. As cyclical sectors suffered – financials and materials fell by 19.6% and 16.1% respectively – defensive sectors prospered. Utilities returned 14.6%.
But managers are bullish on the prospects for Japanese stocks, relative to other developed markets. Joji Maki, the manager of Baring Japan Growth Trust and Baring IUF Japan, says Japan’s valuations, low exposure to the credit crunch and greater emphasis on shareholder value are supportive.
Michael Wood-Martin of Henderson Global Investors says improvements in the global economy could trigger a rally, after lower corporate profits this year. Kiyohide Nagata, the manager of Invesco’s Japanese Equity fund, is more cautiously optimistic, but says he is finding value in financials and cyclicals.
Ken Nishizawa, manager of Melchior’s Japan Opportunities fund, is bullish on the longer-term outlook for Japanese equities, and reports inflows into the fund.
The upbeat consensus was echoed in a report last week from Capital Economics, which said fears over the Japanese economy had been “overdone”.
However, it emerged last week that Thames River Capital closed its offshore Japan fund in September. “Quite simply, there was no demand for assets,” says Michael Warren, the firm’s investment director.
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