Using data from FE fundinfo, Portfolio Adviser shines a spotlight on the funds across different sectors that are smaller than £150m in size but have achieved top-quartile three-year returns relative to their average peer. This month we look at the tiny IA Japan funds that have been flying high in a market that has captured global investor’s attention over the past year – albeit after a few false starts.
New Capital Japan Equity
Fund size: £58m
Japan has been a market darling since the Tokyo Stock Exchange reformed its corporate governance guidance early last year and investors flocked to the region. During this rush – in which £933m flooded into Japanese equity funds (over the 12 months to the end of April), more than making up for £834m in outflows the year prior – some funds have outshone the market. And not all were giants.
The £58m New Capital Japan Equity fund may be one of the smallest in the sector, but a 73% three-year return was far higher than the 11.9% of its average peer. It was one of the most volatile funds in the sector during the timeframe (ranking 13% versus the peer group average of 12.2%) but its significant outperformance meant it paid off. New Capital Japan Equity also had the single highest upside capture over the period, 163.4% at its peak. While the fund is not available on most investment platforms, it is one to look out for in future.
Scottish Widows Japan Growth
Fund size: £124m
Another noteworthy outperformer is Scottish Widows Japan Growth, up 26.7% during the past three years – more than double that of its average peer. Investors may have overlooked this fund due to its small size, but that could change if a proposed merger goes ahead.
The firm has proposed combining the £124m portfolio with the much larger Scottish Widows Global Growth fund, which has assets under management of £1.1bn. This global equity fund, run by the same manager Mei Huang, has a 4.2% allocation to Japan.
Janus Henderson Japan Opportunities
Fund size: £42.1m
It may be one of the smallest players in the IA Japan sector, but Janus Henderson Japan Opportunities is one of the funds that has outshone its peers over the past three years. The £42.1m fund is up 25.7% over the period, beating its peer group – the average size of which is almost 17 times bigger at £707m – by 13.8 percentage points.
Manager Junichi Inoue achieved this by taking highly concentrated positions in 28 stocks. The top three positions alone – Toyota Motor, Hitachi and Sumitomo Mitsui – account for a fifth (20.4%) of the portfolio. It may not suit investors who want a large, diversified set of allocations, but Inoue’s three-year track record has revealed a skill for stockpicking.
He took charge of the fund in 2019, but Janus Henderson Japan Opportunities has delivered strong results over the long term, too. It was the second-highest returning fund in the sector over the past decade, up 197.3%, while its average peer lagged 64 percentage points behind.
Halifax Japan
Fund size: £67.4
Halifax Japanese is a near-identical portfolio to another fund on this list – Scottish Widows Japan Growth. It shares the same manager, Mei Huang, and therefore all of its top 10 holdings are the same, just with narrowly different exposures.
One of the most noticeable differences, however, is in performance, with Halifax Japanese making a slightly lower three-year total return of 24.5%. It may be slightly behind its sister fund, but it is still way above the 11.9% return posted by its peer group.
Like its partner fund, Halifax Japanese has proposed to merge with the much larger Halifax International Growth, also managed by Huang. Combining with this £2.1bn fund would turn the tiny winner into a much larger portfolio.
Nikki AM Japan Value
Fund size: £141m
As its name suggests, the Nikko AM Japan Value fund invests in Japanese equities using a value approach, and doing so has led to some high returns. It is up 24.3% over the past three years, soaring ahead of the IA Japan sector’s 11.9% return.
Analysts at RSMR note that the fund has a “distinctive investment style” that helps it stand out from the crowd, and has helped manager Takaaki Harashima to “pragmatically avoid value traps” since he took charge last year. It targets undervalued businesses that are likely to undergo a transformation and hopes to make positive returns on the back of this re-rating.
“The fund will perform best when value investment styles are in favour which usually coincides with rising expectations for economic growth, and it may struggle when bond yields globally are depressed, and investor focus is on stocks with high earnings visibility,” researchers at RSMR add. “The strategy’s record means the fund can be used as a core holding, although investors need to be aware there is a value bias, which means some economic conditions will make delivering outperformance challenging over shorter time periods.”
abrdn Japan Equity Enhanced Index
Fund size: £102m
The only other IA Japan portfolio to meet the criteria is the abrdn Japan Equity Enhanced Index fund. It tracks the performance of the MSCI Japan index but has a team of active managers to slightly alter its weightings. The £102m passive fund only makes minor active calls to the benchmark, so does not plan to deviate significantly from the MSCI Japan index. This mix of active and passive investing led to a total return of 20.2% over the past three years that is 8.3 percentage points higher than the average fund in its peer group.
This article originally appeared in the July/August issue of Portfolio Adviser magazine
