Waiting Room: Which funds are the hidden stars of Japanese equities?

Japan-Target-Arrows-FS-CoverBanner.jpgFor many investors, a minimum three-year track record remains a prerequisite for considering a fund, immediately ruling out new launches.

While there is an argument for allowing managers to build up a record, the magic three-year rule should be qualified based on who is buying a fund. As a professional multi-manager, it is my job to understand managers and their styles and that should allow me to make a judgement call on new funds. The opportunity cost of missing three years of performance is potentially considerable, particularly given the calibre of managers launching funds in recent years.

This time, we focus on Japanese equities, another traditionally tough area for investing as the troubled region has offered many false dawns over the years.

Shinzo Abe’s second term as Prime Minister brought harsh economic medicine in the shape of his Abenomics policies, which initially drove a strong market bounce before deflation reared its head again this year and the country was forced to adopt negative interest rates.

Japan remains a fairly small allocation across our portfolios. While we currently hold some of the better-known managers in the space, there are several funds worthy of closer inspection.

WEB_0616_WaitingRoom_Image1Aberdeen Japan Equity Enhanced Index Fund 

The debate between active and passive rolls on for some investors while others look to embrace all approaches in constructing balanced portfolios.

With active and passive time horizons being poles apart, the investing space is beginning to be filled by a new breed of fund – smart beta is offering a blend of these two traditional disciplines. The key characteristics are active bets against the chosen benchmark delivered at a low cost. This is essentially what the quantitative team at Aberdeen Asset Management is looking to achieve in managing enhanced index vehicles offering exposure to the UK, North America, Europe, Japan and global equity markets.

The Aberdeen Japan Equity Enhanced Index fund pitches itself against the MSCI Japan Index. In the first year to 31 March 2016, the fund has outperformed the benchmark by 1 per cent. While Aberdeen is best known for active management, it also has a reputation for innovation.

WEB_0616_WaitingRoom_Image2First State Japan Focus Fund

For much of the past year, it is fair to say investors in First State funds have been distracted by changes to the team, which essentially resulted in a split into Hong Kong and Edinburgh-based units.

There is no doubt the challenge in managing funds gets harder as assets under management grow. Smaller funds, by definition, can be more nimble but importantly can also take advantage of liquidity and lower volumes. First State Japan Focus is one of the first new funds of this new era for the group. Launched in October 2015, it  has less than £10m in assets under management.

As the name suggests, this is a concentrated approach, with the current factsheet listing 35 holdings against the benchmark MSCI Japan Index. The co-managers are Sophia Lia and Martin Lau, both based in Singapore. Lau has built a reputation in retail for Asian equity investing, with a particular focus on China. It will be interesting to see whether that can translate into success in the Japanese market.

WEB_0616_WaitingRoom_Image3JOHCM Japan Dividend Growth Fund

The election of Abe in 2012 and his now infamous three arrows policy has brought about new hope in japan.

Part of this is through government-backed reform as listed Japanese companies become more shareholder-friendly – and this fund looks to exploit the growing culture for dividend growth and yield. JOHCM Japan Dividend Growth is co-run by two managers who can boast 70 years’ investment experience – Scott McGlashan and Ruth Nash.

This is an advantage for a new fund: while clearly a different approach to their previous retail experience, it gives potential investors comfort they are investing with seasoned managers. This is demonstrated by the current fund size, which is around £90m two years since launch. The benchmark is the Topix 100 Index and according to the managers’ data, the fund has underperformed since launch. However, this remains early days and further investigation is warranted.