When I last reviewed those funds that give access to Japan – the second largest economy in the world – at the beginning of this year, I was less than fulsome in my endorsement for supporting this market.
Can you blame me? Over five years the average fund has returned nothing – zilch, zero. Not the sort of performance to set portfolio planners scurrying to their asset allocation tools to ensure their clients are adequately represented in this important market.
And it is important, although the real numbers for investors in Japan are a lot worse now than the Lipper tables suggest. These figures are to the end of September and since then shares went south. The week immediately before the British bank bail-out saw the Japanese stockmarket lose a quarter of its value – a worse performance than either Britain or America. Admittedly the market bounced significantly last Tuesday, but why look at Japan now?I was prompted to revisit what once was the darling of British asset allocators by a debate at the Fund Strategy Investment Summit in Dubai. One of the speakers was Andy Xie, a Shanghai-based economist. He rubbished the concept of investing in Japan. The arguments he espoused would be familiar to any following this market. Poor demographics, little local support and disenchanted foreign investors.
Given the way in which Japanese shares were tanking while he was on his feet, you could be forgiven for adopting a similar stance. But, coincidentally, one of the workshops that ran alongside the conference was on the subject of investing in Japan. Société Générale Asset Management (SGAM) delivered a considered – and illuminating – argument on why it could be just the time to return there.
It based its positive approach on valuation criteria. But it also highlighted some interesting comparisons with the condition in which we find ourselves today in the Anglo Saxon markets. In particular, the consolidation of the Japanese banking sector resonated with me, given the extreme shake-out among Britain’s high street banks in the wake of the credit crunch.
The Japanese stockmarket peaked not far short of 40,000 on the Nikkei Dow 225 index back at the end of 1989. A week ago it stood at about 9,150 – less than a quarter of the level it had achieved nearly 20 years ago. Then there were 19 major banks in Japan. Today there are just eight – the rest having merged, been taken over or gone out of business. A similar pattern is emerging in the British banking market. So you could argue that the pain being felt in Anglo Saxon markets has already been a feature of Japanese investment life.
However, the main plank of the SGAM bullish case rests on the way in which shares in Tokyo are cheap in an international context, not just judged by historical criteria. And do not forget that Japan sits close to the epicentre of what will remain the fastest growing region of the world, a global economic slowdown notwithstanding.
Indeed, Andy Xie remained bullish of the prospects for China, arguing that a switch in focus from export-orientated manufacturing to infrastructure spending should keep the economy buoyant in the face of declining demand from the West. Japanese businesses are well positioned to benefit from this change in emphasis. Perhaps Soc Gen’s boys have a real case.
Its performance suggests it knows what it is doing. One of three funds that feature in all of the one, three and five-year tables, it has produced a consistent performance that is worthy of a second glance. Neptune, too, has delivered the goods over all three time-frames. Invesco Perpetual Japan may trail the other two a little, but it is still up there in the top five.
Overall, though, the returns are mixed. Only two funds made money in the year to the end of September, while the average fund lost close to a fifth of its value. Indeed, those unlucky enough to pick the worst performing fund would have lost a third of their investment in that year. Even over five years there are plenty of funds in negative territory, the worst dropping nearly half of its value.
Japan, once the star of internationally-diversified portfolios, has enjoyed only fleeting support from foreign investors over recent years. The tables show that picking the right manager is as important here as anywhere.
It is a hard case to make, though, as the scepticism of many of those at the Dubai conference made clear. This is no emerging market about to be swamped by the financial tsunami. It deserves more consideration.
While in recent years the returns have been positive for only brief periods, the fact remains that this is a large economy that should benefit from the continuing rise in the prosperity of its neighbours.
Many investors will feel reluctant at returning to a market that has disappointed so often, but there will be a point at which the international community will consider the valuation case too compelling to ignore. That time may not be too far away.