Hidden Gems: Six Under-the-Radar Funds in the Japanese Sector

Using data from FE fundinfo, Portfolio Advisor shines a spotlight on funds across a range of sectors that are smaller than £150m in size but have achieved top three-year quartile returns compared to their average peers. This month we look at the small IA Japan funds that are riding high in a market that has captured the attention of global investors over the past year – albeit after a few false starts.

New Japanese capital

Fund size: £58m

Japan has been the market darling since the Tokyo Stock Exchange overhauled its corporate governance guidelines early last year, with investors flocking to the region. During that run – which saw £933m flow into Japanese equity funds in the 12 months to the end of April, more than making up for £834m of outflows the previous year – some funds have outshone the market. And not all have been giants.

The £58m New Capital Japan Equity fund may be one of the smallest in the sector, but its 73% three-year return was significantly higher than the 11.9% average for its peers. It was one of the most volatile funds in the sector during this period (ranking 13% below its peer group average of 12.2%), but its significant outperformance meant it paid off. New Capital Japan Equity also had the highest single gain during this period, up 163.4% at its peak. Although the fund is not available on most investment platforms, it is worth keeping an eye on in the future.

Scottish Widows Japan Growth

Fund size: £124m

Another notable outperformer is Scottish Widows Japan Growth, which is up 26.7% over the past three years – more than twice the average competitor. Investors may have overlooked this fund because of its small size, but that could change if the proposed merger goes through.

The firm has proposed merging the £124m portfolio with the much larger Scottish Widows Global Growth fund, which has £1.1bn of assets under management. 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 fund that has outperformed its rivals over the past three years. The £42.1m fund is up 25.7% over the period, beating its peers – whose average size is almost 17 times larger at £707m – by 13.8 percentage points.

Manager Junichi Inoue achieved this by taking highly concentrated positions in 28 stocks. The top three positions—Toyota Motor, Hitachi and Sumitomo Mitsui—make up a fifth (20.4%) of the portfolio. That may not appeal to investors who want a large, diversified set of allocations, but Inoue’s three-year track record has revealed his stock-picking skills.

He took over management of the fund in 2019, but Janus Henderson Japan Opportunities has also delivered solid results over the long term. It was the second-best-returning fund in the sector over the past decade, up 197.3%, while its average peer lagged by 64 percentage points.

Halifax Japan

Fund size: £67.4

Halifax Japanese is almost identical to another fund on this list, Scottish Widows Japan Growth. It has the same manager, Mei Huang, so all 10 of its largest holdings are the same, just with slightly different exposures.

One of the most noticeable differences, however, is the performance – Halifax Japanese has delivered a slightly lower three-year total return of 24.5%. While it lags its sister fund a bit, it still significantly beats the 11.9% return posted by its competitors.

Like its partner fund, Halifax Japanese has proposed merging with the much larger Halifax International Growth, also managed by Huang. A merger with that £2.1bn fund would turn a small winner into a much bigger portfolio.

Nikki AM Japan Value

Fund size: £141m

As its name suggests, the Nikko AM Japan Value fund invests in Japanese stocks using a value approach, which has led to strong returns. It has risen 24.3% over the past three years, outperforming 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 “pragmatically avoid value traps” since he took over last year. He targets undervalued companies that are likely to transform and hopes to reap positive returns from that reassessment.

“The fund will perform best when value investing styles are favoured, which tends to coincide with rising growth expectations, and may struggle when bond yields are low globally and investors focus on stocks with high earnings visibility,” the RSMR researchers add. “The strategy’s track record means the fund can be used as a primary holding, although investors need to be aware that there is a value bias, meaning that some economic conditions will make it harder to outperform over shorter periods of time.”

abrdn Japan Equity Enhanced Index

Fund size: £102m

The only other IA Japan portfolio that meets the criteria is the abrdn Japan Equity Enhanced Index fund. It tracks the MSCI Japan Index but has a team of active managers who move its weightings slightly. The £102m passive fund makes only small active calls on the benchmark, so it doesn’t plan to deviate significantly from the MSCI Japan Index. This mix of active and passive investing has delivered a total return of 20.2% over the past three years, which is 8.3 percentage points higher than the average fund in its peer group.

The article was originally published in the July-August issue Portfolio Advisor magazine