Deutsche japan is only one of 67 in its class to make positive returns over past three years in a sector where the average loss was 20.63%
Only one of the 67 funds in the Japan sector ' Deutsche Japan Growth ' managed to make positive returns over the past three years and even then investors would have seen less than a 1% return on their investment.
The Deutsche fund made a return of 0.59% over the 36 months, which substantially outperforms the average loss of -20.61% in the sector over the same period.
However, almost all of Deutsche Japan Growth's outperformance was achieved over the discrete year from July 1999 to June 2000, when the fund returned 63.36%, compared to the sector average of 43.19%. That year marked the heavy growth cycle in the market.
The second best performer was Aegon Japan. This fund is currently managed by Matt Harris, but from 1 September will be managed by Craig Mercer, a member of the Japan team. Harris has managed the Japan fund for the past three years but is moving to become head of UK equities to turn around Aegon's ailing UK funds.
Over the three-year period Aegon Japan returned -1.53%, while the average return of the 67 funds in the sector was -20.61%. Under Harris' control, the fund managed to outperform the sector average in each of the past three 12 month periods.
Harris said the strong outperformance resulted from consistently making the right sector calls.
'Over the years, we have managed to make the moves in and out of key areas like technology at the right times,' Harris said. Such has been the case during the technology bubble of 1999 and early 2000, and even more recently after the market started to recover following the 11 September terrorist attacks.
Going back to the middle of 1999, Aegon Japan was overweight technology and growth stocks. Harris said he felt at the time that electronic components and mobile telephony demonstrated the strongest potential and so these were strong themes within the portfolio.
'We did participate in the 'silly season' at the end of 1999 and the start of 2000. Thankfully, however, we got out of those stocks in time. I'm not saying we sold them all at the top, but we sold some at the top and most before they had fallen too far,' he said.
Another beneficial move in technology occurred late last year when Harris bought back into this sector. Following falls in the market prompted by the 11 September terrorist attacks he felt that valuations had become attractive.
'But by December and January we felt these stocks had become very expensive again. So we moved to neutral and then underweight in this sector, redirecting the funds into more cyclical stocks. This proved to be the right call,' he said.
The primary reason for moving out of technology earlier this year was because of valuations. He said although the basic story in technology was not considered too bad, much of the optimism was already priced into the market.
He said, with evidence of a slow and steady recovery in Japan, he wanted to put the money more into cyclical stocks, such as steel and machinery. Examples include Nippon Steel and NKK.
'These sectors have performed well and that helped the fund. Now we believe they have probably done enough work for us, so we are looking to take profits in cyclicals.'
Harris said because he did not want to buy tech, nor cyclicals, the fund is now moving more into stable growth companies. Companies like ASA Breweries and Kao, the cosmetic maker, are therefore taking a prominent role in the fund. Another company that Harris is interested in is Nintendo, which is currently considered quite defensive because it has a lot of cash, yet is currently attractively valued.
Aegon Japan does have higher-than-average volatility, which the manager puts down to the willingness to deviate from the benchmark and high level of turnover in the actively traded fund. The annualised alpha was 8.01%, compared to an average -0.02. The beta was 1.1 and Annualised Standard Deviation was 25.7%, compared to the sector average of 24.01%.
'Aegon Japan holds around 55-60 stocks and is a best ideas fund. We aim to have volatility about average or slightly above average. The fund is very active and turnover is higher than average,' Harris said.
Another strong relative performer, and one of the least volatile funds in the sector was Schroder Tokyo, managed by Denis Clough. This fund lost -2.87% over the three-year period.
The fund outperformed the rest of the sector over the past two discrete years, but underpeformed in the year from July 1999 to June 2000. In that year it made returns of 34.61%, com
The Aviva Investors Multi-asset Funds (MAF) target equity risk rather than absolute volatility. Thomas Wells, Multi-asset Fund Manager, explains that while absolute volatility varies significantly over time, the inherent risk of investing in equities remains relatively constant.
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