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Investing in Japan could be a runaway success

Japan will dominate headlines around the globe for the next three weeks as the Olympic Games kick off this Friday. 

In normal times, a buzz such as this might provide a nice economic boost to the Games’ host country. 

But as the world’s eyes turn to Japan, should the interest of investors turn that way as well? 

Winners: Japanese shares could race ahead even without an Olympic Games boost

WHY JAPAN STILL HAS A WINNING FORMULA 

Sadly, Japan may not get a boost from the Games. After all, the pandemic has scuppered any hopes of a tourism boom. Meanwhile, a lack of enthusiasm for the event at home means there is little opportunity to translate Games excitement into profit. 

Taeko Setaishi is investment adviser to the Atlantis Japan Growth Fund. He says: ‘The Olympics are deeply unpopular with the general public, making it difficult for a company associated with the event to cash in.’ 

But while the Olympic Games may be an economic damp squib, there are plenty of other reasons to suggest Japan has a winning formula for investors seeking to grow their wealth. 

CHANCE TO FIND A BARGAIN BEFORE STOCKS BOUNCE BACK 

The value of Japanese companies had been rising steadily until March this year, when investors grew nervous about Japan’s response to the pandemic. 

Japan had controlled the spread so well that it has been complacently slow to roll out a vaccine programme. Just ten per cent of the population are currently fully vaccinated. 

As a result, the growth in value of Japanese companies has trailed that seen in other countries. Some experts believe this means there are Japanese bargains to be had. After all, not all companies will be affected by a slow vaccine rollout, especially those that sell overseas. 

Darius McDermott is managing director at investment scrutineer FundCalibre. He points out that Japanese companies had been matching the rapid growth seen in the US from December 2012 until March this year. However, at this point investors lost confidence. 

‘As a result, the stock market in Japan is up just four per cent since January this year, compared with eight per cent in the UK, and nearly 18 per cent in the US,’ he says. 

Japan is home to many brands with huge international appeal, which are poised to benefit from pent-up demand across the globe – even if Japan’s own economy takes a little while to bounce back. Among these are Sony, Nintendo, Toyota, SoftBank and Asahi. 

Chern-Yeh Kwok, manager of the Aberdeen Japan Investment Trust, says: ‘Exports have rebounded. Sectors such as technology, autos and those linked to China are already seeing increasing demand.’ 

He adds: ‘We see Japan as a market packed with opportunities, especially in digitalisation, robotics and electric cars.’

BARRIERS TO GROWTH ARE COMING DOWN 

For years, Japan’s economy has had three characteristics holding it back. Firstly, it has been slow to embrace modern technology. We may think of Japan as a land of bullet trains and robotic convenience, but it is also a country that continues to be reliant on fax machines and where only eight per cent of purchases are made online. Secondly, its company structures have been quite unusual in the past, resulting in huge amounts of cash hoarded on balance sheets and strange shareholder structures where non-related companies hold shares in each other. Experts believe this has held back their potential. 

Thirdly, the population is ageing quickly. Construction workers are 55 years old on average, for example, which may have slowed down progress. However, those three limiting characteristics are quickly being dealt with. 

Nicholas Weindling is lead portfolio manager for the JPMorgan Japanese Investment Trust. He believes the pandemic and an ageing population have forced companies to innovate. They have been scrambling to build software systems to allow homeworking. A pivot towards home deliveries has given a huge boost to online shopping sales. 

‘There are some good opportunities for investors in companies that deal with Japanese working practices and consumer culture,’ he says. ‘I hold 40 per cent of my portfolio in internet companies such as GMO Payment Gateway and BASE, which are helping Japan to transition to e-commerce.’ 

Company structures are changing too. The previous Prime Minister S h i n z o A b e brought in corporate governance reforms that are freeing up cash from balance sheets. Current Prime Minister Yoshihide Suga has made digitalising the economy a central plank of his policy.

A VOLATILE MARKET BUT FUNDS CAN HELP 

If you own a global equities fund, you probably already have investments in Japanese companies. For many investors that may be sufficient. But if you believe Japan may outperform other markets, you may choose to hold investments in a specialist Japanese fund as well. 

However, because investments in Japan can be volatile, a Japanese fund should only make up a small element of your portfolio. There are many low-cost passive funds available, as well as active funds overseen by a specialist fund manager. 

James Carthew, at investment research company QuotedData, likes JPMorgan Japanese Investment Trust, which he says is ‘backing the companies at the forefront of technological change’. The fund has significantly outperformed its peers over the past three years, and turned a £1,000 investment into £1,446. 

He also mentions AVI Japan Opportunity, which has returned 8.6 per cent this year. The fund was only launched in October 2018, so it is not possible to judge longterm performance. 

Carthew admires how the fund is ‘trying to find growth companies that also have corporate governance failings that mean they are undervalued, sometimes ridiculously so’. 

Dzmitry Lipski, head of fund research at investment platform Interactive Investor, likes Lindsell Train Japanese Equity. The fund is managed by Michael Lindsell, who has been covering Japanese equities since 1985. It is up just 4 per cent over three years, but 50 per cent over five years. 

He also likes Legg Mason IF Japan Equity Fund for investors looking to invest in smaller and mid-range Japanese companies. The fund is run by veteran investor Hideo Shiozumi who has been investing in Japanese companies since 1970. However, Lipski warns the fund is ‘significantly volatile’. It invests in companies set to benefit from Japan’s ageing population, increasing use of the internet and changing consumer lifestyles. 

Jason Hollands is a director of wealth manager Tilney. He likes Baillie Gifford Japanese and LF Morant Wright Nippon Yield. ‘These take very different approaches to investing in Japan and will therefore work well in different environments,’ he says. 

The Baillie Gifford fund has turned a £1,000 investment into £1,240 over three years and is mainly focused on larger companies. The Morant fund targets companies that pay an income and which appear cheap. A £1,000 investment three years ago would now be worth £1,022. 

For those looking for an income from their investment, McDermott suggests Baillie Gifford Japanese Income Growth which yields just under two per cent.

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