Japan has not been the happiest home for the equity investments of UK pension funds in recent years, according to The WM Company's performance analysis.

Funds had an average return of -17% from their Japanese equity investments in 1997, following a return of -21% the previous year.

The 1997 return in Japan compared to an overall return on assets of 16.8%. Japan now accounts for 3% of UK pension fund assets, the lowest end-year level in the past 10 years. However, the drop to this level is partly due to the poor returns in Japan relative to the stronger Western markets.

Over longer periods, the position in Japan does not look much better - the average return over the last three years was -13% a year, while over 10 years it was -0.1% a year. Over three years, currency was a contributory factor as the yen fell from 160 against the pound at the end of 1995 to 214 at the end of 1997. Currency was less significant over the longer term.

Looking at annualised returns in periods ending in December 1997, it is only over the seven-year period that funds made a positive return in Japan. Nevertheless, the positive news is that successful management made the situation better than it might have been. In 1997, funds outperformed the FT/S&P Japan index by more than 5%. A key reason for this was their low exposure relative to the index in the poorly performing banking sector. UK funds have tended to concentrate on the large exporting industrial groups.

Their investment approach has also helped give funds a relatively strong showing against the index over the longer term.

UK pension fund investments in Japanese equities have outperformed the FT/S&P Japan index over the three, five and 10-year periods ending in December 1997 by 3.8%, 2.6% and 1.7% respectively. None of the other major regions (North America, Europe ex UK, UK or the Pacific) managed to outperform their respective indices over any of these periods.

Robert Greenshields is marketing manager of The WM Company