Over the last five years the Nikkei 225, the main Japanese stock market index, has risen by an impressive 141%, which is well ahead of other markets such as the US, the UK and Germany. Despite these strong returns Japan remains one of the cheapest developed markets in the world. Hideo Shiozumi, who manages the Legg Mason IF Japan Equity fund, thinks that the Nikkei could hit 30,000 in the next few years, which suggests further upside of 30% for the broad market index.
Prime Minister Shinzo Abe, who is just starting his sixth year in office, has brought in a series of pro-business measures that are designed to increase lending and simulate investment. If successful they could help to prolong the current period of economic growth and may enable the central bank to achieve its 2% inflation target, which could signal an end to the decades of deflation.
If you think that the bull market will continue, the highest potential return – and the highest risk option – would probably be Baillie Gifford Shin Nippon (LON:BGS), a £392 million investment trust that invests in smaller Japanese companies. The manager invests in stocks that he considers to have above average growth prospects and strong management teams. Over the last five years it has been the best performing fund in the region with a return of 376%, which explains why the share are trading on an 11% premium to NAV.
The second best performer is the £715 million Baillie Gifford Japan Trust (LON:BGFD), which is slightly less risky as it invests in both small and medium sized companies. It is run along similar lines to BGS, and although the long-term manager, Sarah Whitley, will be retiring at the end of April there is an experienced deputy who is ready to take over. The shares have returned 313% over the last five years and are trading on a 10% premium to NAV.
There is much more choice amongst the open-ended funds with one of the best options being the £2.1 billion Man GLG Japan CoreAlpha. Stephen Harker and his team invest in undervalued companies that remain fundamentally sound and then wait for the performance to recover. It is a concentrated fund that sticks exclusively to large and medium-sized companies and has returned 147.7% over five years.
Schroder Tokyo was launched near the peak of the Japanese market in 1989 and has had only two managers during its lifetime. The £2.6 billion fund has been run by Andrew Rose since April 2004 and offers exposure to a cautious, quality-orientated investment strategy. Over the last five years it has returned 116.4%.
The £746 million Legg Mason IF Japan Equity fund provides exposure to a concentrated portfolio of 43 stocks. Hideo Shiozumi has been at the helm for more than two decades and has achieved superb long-term returns including a gain of 299.8% over the last five years. Shiozumi looks for stock specific opportunities amongst the smaller cap stocks, which makes it a high risk, high potential return type of holding.