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Japan changes the record

Long-term investors in Japan have continually been disappointed. The constant optimism about the country’s recovery has led to its association with the expression false dawn. But while the long term has not been good for investors in the region so far, some managers believe that while the time may not be perfect, the story has improved.

Just two portfolios in the IMA’s Japanese-related sectors have made investors money over the past 15 years. Performance data from Financial Express Analytics shows an investor who put £1,000 into a Japan fund in 1995 would be left with losses in all portfolios bar two – Baillie Gifford Japanese and Baillie Gifford Japanese smaller companies. That said, there are only seven funds dating back that far.

There are 35 Japan and five Japanese smaller companies portfolios with 10-year track records and not one has made a positive return over that timeframe on an offer-to-bid basis. The best two performers over the same period are M&G Japan smaller companies and Schroder Tokyo,which would have turned £1,000 into £902.67 and £857.16 respectively.

The returns look slightly better for investments made during the market lows since 2002. Over the seven years to January 1, 43 funds in the IMA’s Japanese sectors made investors money, the highest of which, Neptune Japan opportunities, turned £1,000 into £2,750.96.

The extreme short term has not proved much better but Japan is little different from most markets as the effects of 2008 hit returns. From January 1, 2008 to the start of 2010, just nine funds made money in the sector. Neptune Japan opportunities has cumulatively gained more than 84 per cent over the past two years and Invesco Japan, the next best performer, gained 17 per cent. This compares with two-year returns in the UK all companies sector where there were also just nine funds in positive territory, with the top return just over 15 per cent.

Paul Chesson, manager of Invesco Perpetual’s Japan fund believes the cycle of ever-lower lows in the Japanese stockmarket through the economic cycles has been broken. He says investors can now look to Japan for the long term as shares are more appropriately priced for likely economic outcomes.

Managers are encouraging but their enthusiasm is sedate and tempered with a realistic outlook.
Managers are encouraging but their enthusiasm is sedate and tempered with a realistic outlook. They are positive but they are also cautious

Manager of the Japanese portion of Witan Pacific, Yasuhiro Mimbuta of Nomura, says Japan is still a difficult market but significant opportunities exist. He agrees the market seems more realistically priced these days. Mimbuta does not deny that investors have a lousy perception of Japan, considering the constant disappointments. Every time a positive action in the region leads to speculation of recovery, it fails to deliver. However, what makes Mimbuta more positive this time is that valuations are finally reflecting the reality of the country. The Japanese market was very expensive 25 years ago, trading on price/earnings ratios of 50-60 and only recently has it come down to 20-30, he says, adding that he believes it will soon be on a 14-15 multiple.

Japanese companies have been complacent for years and while there has been constant talk of restructuring, action in this area has been weak. However, that to is changing. Mimbuta says: “We have been sceptical about restructuring because it was just cost-cutting and half-hearted measures. Finally, they really mean it.”

Investors in Japan funds are equally tired of hearing why this time is different for the region but this time does feel different. Managers are encouraging but their enthusiasm seems sedate and tempered with a realistic outlook. Yes, they are positive but they are also cautious.

Witan Pacific, managed by both Nomura and Aberdeen, and the allocation within Mimbuta’s half of the portfolio is not just exposed to Japan. In fact, the portion of the trust run by Nomura is underweight Japan, as it has been for years. However, Mimbuta says this is the smallest underweight position in Japan Nomura has have ever had. “We are finding opportunities but it is hard to imagine we will move to an overweight position in the near future.”

Despite Chesson’s overall optimistic outlook for the region, on a stock-selective basis he still believes the region’s economy will continue to be prone to boom and bust. “Given the levels of debt and the ageing population, it is an economy driven by the external environment and today’s economic outlook is not so different from the past. However, from a stockmarket point of view, what is different is that stocks are now valued for just such expectations.”

With regard to his portfolio, Chesson says a year ago he was looking overseas almost entirely but now has a 50-50 split with overseas and domestic plays. He says: “For me, the key is not to focus on whether Japan will underperform the developed world economically, it is whether I can find companies on cheap valuations that can grow in spite of those factors. At the moment, the answer is a resounding yes.”

Sarah Whitley, manager of the Baillie Gifford Japan trust, says the Topix is little changed over the past six months and she points out there is little clarity as to what time-horizon overall activity can exceed the pre-crisis peak.

“We have yet to see the impact from the withdrawal of some of the stimulus measures put in place during the crisis,” she says. Still, she adds, she is finding many more companies to buy than sell at present and favours the under-researched small and mid-cap area of the market
The Japan story right now is not particularly headline-grabbing but maybe that should be an encouraging sign for investors. Perhaps the muted enthusiasm about the region indicates that this time really will be different.


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