fund corner
the Lindsell Train and Legg Mason funds and has a different emphasis with the main sector weighting being the 30.7% exposure to Industrial companies. Chris Taylor, the manager, has a bias towards large- and mid-cap stocks and currently favours the multi-nationals that earn the majority of their revenues overseas. He is able to hedge the currency back to sterling whenever he thinks it would be appropriate and has kept the hedge in place since 2009, which will have contributed to the positive performance. He also has the freedom to use derivatives to limit the downside risk.
Smaller companies funds The Japanese smaller company funds have done even better than their largecap equivalents, with an average threeyear return of 60.2%. This is quite normal in a bull market, although they would be more vulnerable whenever conditions deteriorate. There are only five open-ended funds in the sector with the top performer being Baillie Gifford Japanese Smaller Companies with a gain of 90.1% over the last three years. It is managed by John MacDougall, who invests in attractively valued small companies that offer decent growth opportunities. A good example is Cookpad, which operates a popular recipe website. This has been one of the fund’s strongest performers due to the increased marketing by food producers and supermarkets. The fund has also benefited from its holding in the blood testing company, Sysmex, whose latest machines have been selling well in countries such as the US and China. MacDougall invests for the long-term and there is very little turnover in the portfolio, although he has recently bought into the biotech companies Peptidream and Nanocarrier. These are typical of the smaller, innovative businesses that he likes to target. Max Godwin, the manager of the M&G Japan Smaller Companies fund, is a value investor and targets businesses that are out of favour with the market.
44 | www.masterinvestormagazine.co.UK | juLY 2015
He has recently topped up his holding in Cocokara Fine, which is one of the five largest nationwide drugstore chains in the country. The business is currently undergoing a restructuring to try to adddress various inefficiencies and appears to be undervalued.
In second place is iShares MSCI Japan EUR Hedged UCITS ETF, with a threeyear return of 105.1%. This uses physical replication and is fully hedged back into euros. It has assets under management of â‚Ź4bn, 314 underlying holdings and a Total Expense Ratio of 0.64%.
Another recent purchase is the regional bank, Tokyo TY Financial Group. The company is struggling due to the low interest rates, but Godwin believes that the shares are cheap relative to the expected earnings and that it has a welldiversified loan book. His fund has a total of 50 holdings and has returned 66.4% in the last three years.
The other top performer is a leveraged ETF called ProShares Ultra MSCI Japan. It is designed to pay twice the daily return of the MSCI Japan index and would obviously be a lot more vulnerable than the others in the event of any market weakness.
A passive alternative FE Trustnet lists 48 passively managed ETFs in the sector. The majority of them track the MSCI Japan index and have produced returns of between 40% and 50% over the last three years, with the two standout performers both hedging the currency. Leading the way is iShares Japan Fundamental Index CAD Hedged with a gain of 143.7%. It is managed by BlackRock and is a really unusual fund with the index having a value tilt and thecurrency hedged back into Canadian dollars.
There are also three small cap ETFs, although the performance has not been that impressive with an average threeyear return of 48.7%. If you want exposure to this part of the market an actively managed fund would be the better option as the managers have plenty of scope to add value.
Investment trusts There are only four investment trusts that provide exposure to large cap Japanese equities, but they have an excellent track record with an average 3-year return of 121.1%. One of the main reasons that the investment trusts have outperformed their open-ended counterparts