Performance of the Aggressive Adviser Fund Index has suffered lately, mainly as a result of its Japanese equity exposure. Nine Japan funds make up 7.4 per cent of the index and, according to data from Financial Express, the average Japan portfolio fell by almost 16 per cent in the six-month period ending August 29.Overall, seven of the 10 worst-performing funds were invested in Japan, with many badly hit by the equity sell-off which caused global stockmarket downturns in May and June. Legg Mason’s 250m Japan equity portfolio, for example, has fallen by 29 per cent since the end of February. However, according to the recent AFI survey, most panellists are still bullish on Japanese equities and the economy. Six respondents out of 14 said they expect Japanese equities to outperform other major regions over the next one and three years. The majority also said the Japanese economy will see the strongest growth in gross domestic product over the next 12 months. Ben Willis, head of research at Whitechurch Securities, is less positive on Japanese equities over the next year. He says: “We see the global economy slowing. We are not expecting a recession in the major markets but there are tough times ahead for equities. The way Japan suffered in the correction is a sign that there is a lot of foreign investment propping up the economy. Another slight correction and the region would be affected again.” In response to the uncertainty, Whitechurch has moved its discretionary portfolios into bigger capitalisation funds and defensive markets, including the US. Willis says: “We have taken profits and are looking for safe havens. We still have exposure to Japan but we are underweight. I would say we have cut back from 15 per cent in more aggressive portfolios to about 10 per cent.” Despite Willis’s cautious approach over the short term, he also points to a change in the fundamentals of the Japanese economy, with an established recovery fuelled by domestic demand and consumer spending. He says: “We have seen a lot of false dawns before and this is different. With interest rates now positive, you could say Japan is out of recession. There has been a significant change but we are not as bullish as other people.” Japan funds also feature in the AFI Balanced and Cautious indices. Balanced contains six funds, with a weighting of over 3 per cent. Cautious has the lowest exposure to Japan, with four funds representing just over 1 per cent of the index. The panellists will have the option of changing their weightings and fund choices during the next rebalancing on November 1.