Bask In The Rising Sun With These Funds!

• Investors who want Japanese equity exposure can consider our recommended products, Aberdeen Japan Equity and LionGlobal Japan Growth funds, which have been strong performers in the Japanese equity space over the past few years
• The Nikko AM Japan Dividend Equity fund is also another viable choice for investors to capture the improving profitability and investor-friendly environment in Japan
• For aggressive investors, they may go for small-cap equity funds to ride on the trend of an improving domestic economy and on ‘Abenomics’
• For investors who prefer index funds, we listed our available options below

As we pointed out earlier in our recent update, economic momentum has improved in recent quarters and progress have been gradually seen in reforms in the Land of the Rising Sun. In this piece, we provide a brief primer on ways to capture investment opportunities in Japan!

What Japanese Equity Funds Are Available?

Investors who are not familiar with the Japanese market but would like to catch the opportunities there could go for actively-managed strategies that we offer on FSMOne. We currently have a total of thirteen different products that offer you Japanese equity exposure. Year-to-date, this group (Japanese equity funds) have delivered an average year-to-date return of 13.9% as compared to the 15.5% average return of all equity funds on the platform (as of 11 November 2017). They have generally underperformed their other peers, particularly those invested in the generic Asian equity space or single country funds such as the likes of Chinese equity funds, but as we pointed out in our update, there is still room for the Japanese market and opportunities are available for the taking!

Our Recommended Strategies

For some time now, two products from the Japanese equity category that have stood out to us over the years are our incumbents on our Recommended List: Aberdeen Japan Equity fund and LionGlobal Japan Growth Fund! Both of them sport superior risk-adjusted returns as compared to their peers over the years and have rightfully earned their places on our List for some time already.

Chart 1: Performance of Several Japanese Equity Funds Since 2010

Despite underperforming its benchmark (TOPIX) at times, the Aberdeen Japan Equity fund has historically displayed strong risk management abilities, recording lower drawdowns and downside deviations than its peer averages. The team at the helm of the fund adopts a high conviction (aiming to hold between 30 to 40 stocks at any point of time) and benchmark-agnostic approach, with a focus on “buying good quality stocks at a reasonable price and holding for the long term.” This style would consequently leave the portfolio looking relatively different from its benchmark. For long term investors who prefer such an investment approach, Aberdeen Japan Equity fund may be an appropriate choice for your portfolio.

On the other hand, the LionGlobal Japan Growth Fund, which is another bellwether on our List, also utilises a bottom-up approach to find appropriate candidates for the portfolio in order to provide long term capital growth for investors. However, as compared to Aberdeen Japan Equity fund, the LionGlobal Japan Growth Fund tends to tilt towards the small and mid-cap equity space as the investment manager opines that there tends to be less undervaluation in the large-cap segments, while smaller-capitalised stocks also tend to have higher growth profiles relative to its larger peers.

The investment team takes a diversified approach in managing the strategy, with its ten largest holdings comprising less than 20% of its overall assets (as of end-September 2017). The strategy also stands out among its peers due to its rather long track record in the Japanese equity market (16 years and counting). The LionGlobal Japan Growth Fund could also complement existing large-cap equity exposure that you may already have, given its tilt towards the smaller and mid-capitalised segments in Japan. The SGD-hedged share class is also available for investors who wish to express a negative view on the JPY against the SGD.

Nikko AM Japan Dividend Equity – An Income Strategy For Japan!

Other than our two recommended products for the space, a relatively newcomer to the category in recent years is the Nikko AM Japan Dividend Equity fund, which was launched back in July 2013. Since then, the SGD-hedged class of the strategy has generated a total return of 71.82% (as of 10 November 2017).

Chart 2: Performance Of Nikko AM Japan Dividend Equity Fund Since Launch

Managed by Toshinori Kobayashi who is based in Japan, he is supported by Nikko AM's in-house equity research team in managing the fund. The team's strategy is unique among the category as it pursues a dividend-seeking investment approach in order to provide a total return of capital growth and income for investors. Companies that offer attractive and sustainable dividends alongside relatively strong sustainable cash flows, stable growth and stable payout would interest the investment team. The team has no adopted benchmark, and will adopt a relatively-concentrated style of holding around 50 positions at any one point of time.

While Japanese corporations are not typically known for high payout ratios and attractive dividend yields, recent policies rolled out by the government under Prime Minister Shinzo Abe aim to improve corporate governance and ensure a more investor-friendly environment. The JPX-Nikkei 400 Index that was created during PM Abe’s term is one example of such policies, with the index aiming to promote the appeal of Japanese corporations – with constituents only added to the index if they meet certain criteria that stresses efficient capital deployment and shareholder-friendly management practices. The team managing the Nikko AM Japan Dividend Equity fund takes the current reform climate into account when managing the strategy, and will be a beneficiary if Japanese corporations continue improving their dividends and profitability through reforms.

The fund sports an annual management fee of 1.50%, and is available via a SGD share class, a SGD-hedged class and a USD-hedged class. All of them offer monthly distributions, ideal for income-seeking equity investors.

Japanese Small Caps – For Aggressive Investors Who Are Interested

While most of our Japanese funds offer access to the large cap equity market, investors with a stronger risk appetite can also consider the small-cap space as a way to capture the domestic opportunities within Japan. Domestic momentum has picked up, and smaller-capitalised companies are generally a beneficiary of the improvement in the domestic economy. Additionally, these companies may be more insulated from geopolitical uncertainty stemming from the Korean peninsula, and are less affected by the swings in the JPY.

With Abe and his party firmly in power following the latest elections, his reforms (also known as ‘Abenomics’) could continue, giving a massive boost to business confidence within Japan and foreign investor sentiment. As shown in Chart 3 below, the Bank of Japan’s (BOJ) Tankan surveys indicates that confidence among Japanese smaller-capitalised businesses have been trending upwards over the past few years, and are at cycle-highs as of the end of 3Q 17.

Chart 3: Confidence Of Japanese Small Enterprises At Cyclical-Highs

In fact, the smaller-capitalised universe has outperformed their larger peers year-to-date, as shown in Chart 4 below. Both small-cap indexes (TOPIX Small and MSCI Japan Small Cap) have clocked higher returns in JPY terms than the benchmark indexes.

Chart 4: Small Caps Have Generally Outperformed Their Larger Peers Year-To-Date

On FSMOne, we have three equity funds for the Japanese small-cap space: BNY Mellon Japan Sm Cap Eq Focus Acc SGD-H, Henderson Hzn Japanese Smaller Comp A2 USD-H and United Japan Small and Mid Cap SGD. While the Henderson Hzn Japanese Smaller Comp A2 USD-H has been in the market for a while, the : BNY Mellon Japan Sm Cap Eq Focus Acc SGD-H and United Japan Small and Mid Cap SGD are fairly new products in the space, having been around since December 2013 and early-2014 respectively. The former tends to run a concentrated approach in the market, while the latter diversifies across the mid-cap equity segments apart from having exposure in small-cap stocks, suiting investors who prefer a more diversified approach.

The higher growth rates of smaller-capitalised companies as well as their orientation towards the domestic market will serve as a viable way of benefiting from ‘Abenomics’ as corporate reforms and growth continue to improve within Japan. If you could and are willing to stomach the risks of small-cap equities, why not pick up some small-cap equity exposure if you want exposure to Japan for your portfolio?

If You Prefer Index Funds:

For investors who prefer broad market exposure to Japan via index funds, we have a few HKEX and SGX-listed exchange-traded funds (ETFs) that track Japanese equity indexes for investors to select from, as shown in Table 1 below:

Table 1: Japanese Equity ETFs On FSMOne

Investors are recommended to be aware of the indexes that these index funds track, so as to know your form of exposure when investing via these instruments. Additionally, while they are expected to deliver returns that are slightly below their respectively-tracked indexes net of expenses, investors are also to take into account the bid/ask spreads when trading these instruments (especially if you are trading them frequently).

The Research Team is part of iFAST Financial Pte Ltd.