Japan outperformance: One in the eye for passive investment?


The performance of Japanese funds demonstrates the merits of active management and can be seen as “one in the eye” for the passive investing argument, according to Premier multi-asset manager Simon Evan-Cook.

Premier’s latest State of the Universe sector review shows that the average investor in Japan funds has outperformed a tracker by 11.1 per cent over the past five years.

Over this period, active managers have navigated Japan’s economic stagnation, the global financial crisis, 2011’s earthquake, tsunami and nuclear crisis, the impact of the severe Thai floods and five different prime ministers.

The five-year weighted return for the Japan sector, which looks at outcome seen by the average investor rather than the average fund, stands at 34.5 per cent – outperforming the 23.4 per cent experienced by trackers, represented by L&G Japan Index.

The average fund in the space also has outperformed the passive option with a five-year return of 33.3 per cent being reported for the IMA Japan sector.

Evan-Cook says: “Investors in this sector have done very well. But then the managers have done OK too, as shown by the performance of the conventional sector average. This is well ahead of the benchmark, and fully 9.9 per cent ahead of the tracker over the past five years (after annual management charges).

“Fund holders have done themselves a further favour by backing outperforming managers, meaning they are collectively 11.1 per cent better off than if they’d gone for the tracker. Whichever way you look at it, this is one in the eye for the passive case – so don’t expect to see it appearing in any active-bashing quantitative studies any time soon.”

The manager notes a number of reasons why funds in the IMA Japan sector have managed to achieve their outperformance. This includes the fact that Japan was out-of-favour with investors for some time, meaning “an element of Darwinism has set in”.

“With senior management of asset managers sensing no chance of a rising tide to lift all boats, they have been scuttling the weaker offerings to ‘streamline’ their fund ranges,” he says.

“The strong, however, have stayed afloat. From a fund analyst’s anecdotal perspective, the result is a sector that contains a high proportion of well -managed, genuinely investable funds, the quality of which would see them clean up in a less competitive, but more popular sector (such as Global Emerging Markets).”

He also points that an evolution towards the value style among Japanese funds could have aided performance over recent years, as this tends to outperform a growth approach in most markets over the long term.

“Not only is the average fund holder well ahead of the tracker over five years, the average fund manager has excelled too. For UK investors, active management of Japanese equities has been worth paying for,” he concludes.

Evan-Cook highlights the GLG Japan CoreAlpha, Polar Capital Japan, Schroder Tokyo and Morant Wright Japan funds as products that have stood out for their consistent outperformance.