Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Japan sector.
This time last year, I pondered whether it was “time to take a good hard look at Japanese equities”. It turns out it was, although few UK fund investors agreed.
The FTSE Japan index is up 31.91% in sterling terms over the 12 months to 19 May 2026, ahead of US large caps (Russell 1000: 23.41%) and the FTSE All World index (25.65%). Over the same period, the Investment Association Japan sector has delivered within a percentage point of the FTSE Japan: well ahead of IA North America (19.05%) and IA Global (18.93%), if lagging Asia Pacific ex Japan and Global Emerging Markets (42.59% and 41.15%, respectively). However you measure it, Japan has been one of the best-performing developed equity markets over the period, pipped only by Asia Pacific ex Japan and US small and mid-caps, as measured by the Russell 2000—and the latter only by a few basis points.
This strong performance seems to have slipped under the radar of many, becoming the “ninja stealth rally”, as finance hacks grasped for a national stereotype to describe the phenomenon (blowing the dust off a term from 2016 to fit the bill).
Some £4.56bn has been pulled from IA Japan funds over the 12 months to the end of April 2026. To be fair, IA North America and UK All Companies funds have lost a lot more, and Asia Pacific ex Japan has suffered almost as much, despite turning in a great performance. Nonetheless, we have collectively shrugged our shoulders at the rally.
Why? Investors have heard the heralding of a good many false dawns down the years. All too often, the sun has stubbornly refused to rise. And Japan still faces considerable structural challenges, from persistently low growth to the long-term problems brought by an aging population.
However, things do seem to be changing on some fronts. Japan’s base rate has been on the rise since early 2024, and now stands at 0.75%, with expectations of a hike to 1% in June. As you swallow hard at the numbers going up at petrol stations, that may seem like nothing, but Japan has been struggling with the threat of deflation for decades, and ran a negative rate from 2016 to 2024. The country needs a measure of inflation and, at long last, it seems to be happening. This reflation in turn spurs wage growth and consumption, supporting industries beyond the typical exporters. What’s more, the ongoing corporate governance and capital-efficiency focus is creating re-rating momentum.
At the sector level, the largest positive contribution came from technology, semiconductors, and AI-linked investment companies, as global AI/semiconductor capex enthusiasm has boosted Japan’s chip-equipment and electronics market. Tech is the largest proportion of equity markets in the US and many emerging markets; Financials in the UK and Europe; and Industrials in Japan, followed by consumer discretionary, financials—then tech. At 13%, however, the Japanese technology sector still carries more than five times the weight of its UK equivalent, if less than a third of the US.
Will the good times continue to roll? There are certainly dangers. For example, that re-rating has made Japanese stocks more expensive, pushing the Topix forward PE above its historical range. While it’s clearly not the only equity market to be pricey, downside risk has increased. Japan is also very dependent on energy imports—an obvious worry in this environment. But, that said, corporate Japan does seem to be getting itself into better shape.
Four out of the 10 funds in the table below have been there for the past two years: WisdomTree Japan Equity UCITS ETF, Lazard Japanese Strategic Equity, WS Morant Wright Nippon Yield, and WS Morant Wright Japan B Accumulation. The Wisdom Tree fund is passive—as are the two Xtrackers funds on the table—and invests in dividend-paying stocks. Value funds dominate the table. That’s not too surprising where value has been a significant contributor to returns over the past three years, in what is a value-skewed market. But styles can shift, and over the past three months value and dividend factors have underperformed (see here, p10), with growth funds making the running. Interestingly, new entrant JK Japan GBP Institutional—which targets undervalued growth companies—is the only one that makes the top 10 over both periods.
Table 1: Top-Performing Global Emerging Markets Over Three Years (with a minimum five-year history)
All data as of May 31, 2026; Calculations in GBP
Source: LSEG Lipper
This was first published on p21 of the June edition on Moneyfacts.
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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.
