Using the Lipper Leaders scoring system to analyse the best performing funds in the IA Japan sector.
I’ve loved Japan since I was knee high to a sumo wrestler: its culture, food, geography, cinema, and people. The year-and-a-bit I lived there was one of the happiest times of my life. A plate of sushi, a can of Sapporo in front of a Kurosawa film, and I’m close to heaven.
Would that I could muster the same enthusiasm for its stock market. Truth be told, UK fund investors seem to feel the same, with 12-month flows to April running at negative £2.5bn. Over the three months to the same date, they have pulled £1.37bn.
Which, apparently, is just at the point when we should have been committing capital, as the Topix index has been one of the best performers of the year so far. Indeed, there’s been lots of talk of a new dawn for the stocks of the land of the rising sun. “Tide turns finally for Japanese stocks” proclaimed one recent headline in the Financial Times; “How Japan got its swagger back” another.
Despite the strong performance of the Topix, in sterling terms the sector is still down over the three months to the end of April, so perhaps some trepidation isn’t unwarranted.
The FT’s Unhedged column lays out the case, for and against, for Japanese equities, with the rally is “in full swing”, with the proof point being Warren Buffett’s visit to Tokyo in April, with global investors (but, not yet, UK fund investors) “rushing in”, and the Topix is at a three-decade high.
It offers three reasons: first, the change in attitude towards shareholders, especially regarding raising return on equity. “The Tokyo Stock Exchange has also been needling Japan’s many capital-inefficient companies, those with price to book ratio below one, to shape up or face penalties,” with share buybacks for the fiscal year 2022 were at a record high. But, as the FT acknowledges, that cultural change can take a long time. Plus, we have been here before, with Shinzo Abe’s “three arrows” a decade ago, which ultimately missed or simply rebounded from their targets. Anyone who has sat through a demonstration of Kyudo, Japanese archery, will be familiar with the outcome: it takes a long time to get there, and when you do, the results can be underwhelming.
The second reason is the return of inflation may push prices up, eventually killing the deflation that’s held the economy back for three decades. But, notes the FT, inflation isn’t getting its claws into Japan as it is elsewhere.
Lastly, there’s the “sense that Japan is a haven market in a risky world, especially for China-shy investors seeking Asia exposure.” Yes, but no: is Japan really a replacement for China? They’re both manufacturing centres, but of a very different nature: one doesn’t go to Japan for cheap labour—or not since the 1960s in any case. Developed markets are no substitute for emerging ones, no matter how large or important the latter.
Another advantage is that Japan is also trading on a lower price-earnings ratio that other major developed market indices such as the S&P500 and MSCI World. But that’s nothing new.
We can perhaps add one more, and that’s the value bias of the Japanese market, a characteristic that it shares with the UK market, and which may continue to outperform if rates remain elevated.
The Lipper Leaders Consistent Returns figures show that four out of the top ten have above average risk-adjusted returns, with two of them rated a 5 – the highest. This shows that the managers have successfully delivered a higher return than their peers for a similar risk, or comparable returns at a lower risk. Conversely, the same number of ones and twos in the table indicate that these returns are delivered with higher than average risk, with which investors need to be comfortable if they opt for such funds.
So, while I concede there’s a case for Japan, and it’s far from a basket case of a market, I can’t help feeling we’ve heard this before.
And the answer to the question posed in the headline is kishi-kan.
Table 1: Top-performing IA Japan funds over three years (with a minimum five-year history)
All data as of April 30, 2023; Calculations in GBP
Source: LSEG Lipper
This article appeared in the June edition of Moneyfacts, p21.
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The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
