After an exceptional year in 2003, average returns of funds investing in Japan have been more subdue...
After an exceptional year in 2003, average returns of funds investing in Japan have been more subdued this year. Standard & Poor's fund analysts said in July's report on the sector that the rally that was evident in 2003 continued into the first four months of this year. However, factors such as booming oil prices, worries about a possible slowdown in China, and the probability that US interest rates would increase (which they subsequently did), caused a sell-off. Since then, concerns remain regarding the strength of Japan's economy, and the continuing weakness of the US currency is also likely to remain a concern.
Continuing a trend also seen in many other regions, smaller companies funds outperformed, seeing returns of 14.5% on average, compared to mean gains of 6.5% for their large-cap counterparts. As also seen in other regions, such as the UK and US, smaller companies funds dominated the top rankings - only two of the 10 best performing funds over one year were not in the smaller companies Japan sector.
In the Standard & Poor's sector update for the region, released in July 2004, one of the key questions was: will the small-cap market be able to sustain its stellar returns? The report pointed to the many small-cap companies that have reported better-than expected earnings numbers - that should sustain confidence in the category in the short term at least.
The top ranking fund in the region is the AA-rated Atlantis Japan Opportunities fund, which gained 43% in the period, significantly outperforming its sector average. The fund is sited in the smaller companies Japan sector, due to its heavy bias towards investing in small and mid-cap companies. The Standard & Poor's ratings report states that the rationale of this inclination is that the team managing the fund have "seen for many years more entrepreneurial management and more niche businesses which can grow regardless of the level of Japan's GDP." The fund has a relatively short track record, having only been launched in October 2003, but the manager has 20 years of investment experience and has had a successful track record at Atlantis since 1996. The fund seeks to invest in companies that have growth prospects as well as strong balance sheets and cashflow, and management with quality and strategic thinking.
Another rated fund of note is the AXA Rosenberg Japan Small Cap fund, which returned just under 27% during the year. A quantitative process is used to identify mispriced companies, and the ratings report states that the end process is a bias towards absolute value, and it is therefore a contrarian portfolio. This can result in underperformance in momentum-driven markets, but relative performance has been robust since the launch of the fund. The fund has an AA rating from Standard & Poor's which fund analysts attributed to the process used by the fund, which has been proven across many different regions, and the solid team and research support.
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