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BLOG: Three funds for post-Abe Japan

Written by: Darius McDermott
I’ve always backed the traditional wisdom of taking a long-term view to investing and, by and large, it has proved correct – unfortunately the one part of the world bucking that trend is Japan.

The stark truth is that UK investors would have been better off keeping their money in cash than the Japanese stockmarket in the first 15 years of this century.

But things had begun to change following the appointment of Prime Minister Shinzo Abe in 2012. His eight-year term has brought political stability, enhanced international presence and introduced a new brand of constructive economic and social reform, ‘Abenomics’.

After decades of deflation and disappointing stock market returns, the Nikkei 225 – Japan’s main index – returned 125% over this tenure.

That’s why the recent announcement of Abe’s resignation is a concern for investors – many of whom are worried about the return of political instability and a reversal of a number of the changes he introduced to tackle the long-term headwinds facing the Japanese economy – namely an aging population and expanding social welfare expenses.

Abe’s departure will trigger a race for the leadership of his ruling Liberal Democratic Party, just as Japan struggles with Covid, an economic downturn and external disputes. The positive is that many expect his successor will not rip up the rule book that Abe has created.

But sceptics of Abe’s tenure would point to further strides being needed on healthcare and technology implementation in Japan, both in private and public sectors, on top of managing welfare and demographics.

However, while policy dictated the performance of markets in the early part of Abe’s tenure, Goldman Sachs says the market has been driven more by micro and company specific factors since 2015.

It says this is “clearly evidenced by the divergence of returns among companies as well as the decreasing correlation between market returns and the exchange rate”, indicating Japan’s fortunes could be stock specific in the future.

With this in mind, here are three Japanese stockpickers you may want to consider:

Comgest Growth Japan

Comgest Growth Japan co-manager Richard Kaye says the opportunity for investing in specific companies in Japan remains one of the most interesting among major markets – adding that around 3,000 listed companies have survived all types of economic scenario.

His 30-40 portfolio has six factors to determine quality. These are the business model, financial criteria, organic growth, barriers to entry, sustainability of the business and quality of management.

T. Rowe Price Japanese Equity

Fund manager Archie Ciganer says the case for Japanese equities is still a good one, especially as we continue down a path of improvement from a structural and global economic dimension. He believes the region offers a compelling active management case, given it’s under-owned and has positive change dynamics. His fund invests in around 60-100 Japanese companies of all sizes, although with a notable overweight to smaller firms.

First State Japan Focus

First State Japan Focus co-manager Sophia Li says the biggest fear would be improvements to corporate governance come to a halt.

However, the consensus of the First State team is that this is now an irreversible trend. The First State Japan Focus fund invests in large and medium-sized Japanese companies, with a heavy emphasis on quality. The team believes that despite having a large investment universe, the Japanese market is under-researched and ignored by most international investors.

Darius McDermott is managing director of Chelsea Financial Services & FundCalibre

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