Hideo Shiozumi’s £208m Legg Mason Japan Equity fund scored the highest returns for investors in the first half of 2013 but commentators have questioned if it is time to keep buying the fund.
Legg Mason Japan Equity is ranked first quartile in the IMA Japan sector over one, three and five years to 15 July 2013 and made its investors a ￼53.75 per cent return in the opening six months of the year, compared with the 24.12 per cent gain in its peer group.
However, fund selectors have pointed out that the fund is known for its volatility and argue that it is not a Japan portfolio for every investor.
In his recent review of the Japan sector, Premier senior multi-asset investment manager Simon Evan-Cook says: “This is a small-cap growth fund, which should really be in the dedicated IMA Japan Smaller Companies sector. It will strongly outperform when small-cap growth stocks are rallying, and sharply underperform when they’re not.
“We have nothing against this kind of cyclicality in a fund. In fact, we’re all for it: it’s a sign that a manager is sticking to what he does best, and not attempting to be all things to all investors. And we suspect that if one were to buy Mr Shiozumi’s fund at the right time and hold on for dear life, then (other than some minor hair loss) the result would be a good one.”
But Evan-Cook notes that most investors tend to buy funds at the wrong time and highlights Legg Mason Japan Equity’s history as why this could be problematic.
Legg Mason Japan Equity last experienced a run of stellar performance in the mid 1990s, when it did well after the Japanese market rallied strongly on the back of “dramatic reforms” brought in by the government at the time. By March 2006, the fund was top in the sector over the preceding ﬁve years and grew to its peak size of £250m.
However, the following three years saw the Japanese market drop by 32 per cent – and Legg Mason Japan Equity plummeted by 73 per cent. The fund’s assets under management declined to £31m over the next year before starting to recover.
Evan-Cook adds: “So where are we today? That’s for market timers to judge. But Japan is rallying on the back of dramatic reforms enacted by its prime minister and Legg Mason Japan Equity is the sector’s top performer over ﬁve years, drawing fast inﬂows that have seen it grow threefold in the last ﬁve months (it was £69m at the start of 2013, just ﬁve months later is £208m). Sound familiar?”
Hargreaves Lansdown investment analyst Richard Troue says Legg Mason Japan Equity is a “really difficult” fund to form a view on. He notes that Shiozumi takes a growth approach investing and tends to focus on the ‘new Japan’, technology businesses, and healthcare and consumers companies that benefit from the ageing population.
“In theory, that all sounds very sensible. As a result he is focusing on small-cap, growth-oriented companies that have the potential achieve explosive performance, which has been seen over the past six months,” he adds. “Indeed the fund has been performing well for a while now but when the market sells off, it does get hit very hard.
Troe says the fund may not be suitable as a core Japanese holding for most people, as the typical investor would want to own a portfolio concentrated on larger, more mainstream companies. However, investors who are “particularly positive” on Japan could find it an appropriate satellite fund – especially if it is picked up after a spell of weaker performance.
“On the whole, I do think the manager knows what he’s looking for and has a very clear focus,” he concludes. “There is a very specific philosophy here but investors do have to appreciate that it can come with significant volatility and it is quite a high risk fund.”