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Impact Investing

IPE special report May 2018

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US fund investors take the plunge

Last year saw a substantial turnaround in Japan’s fortunes. For once, the continual optimism that Japan’s economy and stock market were on the up seemed well-placed.
As with the US, the technology sector was the strongest performing market segment – the JASDAQ index rising a satisfying 280%, putting the NASDAQ’s concommitant gain of 86% somewhat in the shade. The rise of new economy stocks at the expense of the old economy stock was similar to events in the US, and the fact that the Japanese market suddenly seemed to be much more familiar further encouraged US investors to take the plunge.
In the year to April 7, the average for Japan diversified equity funds has been down 8%, while the smaller companies funds have lost an overall 28.3%. This downswing has also deflated the one year returns of the funds. For the past 12 months, the overall gain for Japan equity funds was 60.7% while smaller companies funds rose an average 61.5%. Nevertheless, these figures do compare favourably to the universe of offshore funds targeting Japan – offshore general equity funds have an overall one-year return of 50.5%. Offshore Japanese smaller companies have outperformed on an overall basis (up 91.6%), but the US figure is distorted by the fact that the DFA Japanese Smaller Companies Portfolio has returned a meagre 11.7% in this period – the fund’s small cap value orientation resulted in it missing much of the JASDAQ run-up. Excluding DFA, the other two US funds would have outperformed the offshore funds.
The top performing general equity fund over the past 12 months is Warburg Pincus Japan Growth Fund, managed by Nick Edwards and Todd Jacobsen, who also manage the top-performing Warburg Pincus Japan Smaller Companies Fund. The common share classes of these funds rose 110.1% and 122.6% respectively for the 12-month period ending April 7, 2000. Although the Japan Growth Fund has a more diversified ‘multi-cap’ approach, it holds many of the same stocks and has a very similar industry breakdown as the Smaller Companies Fund. Among the top holdings of both funds are names such as Softbank, Hikari Tsushin, Sony NTT and Trans Cosmos, and as a result both funds have fared quite poorly on a year-to-date basis, as many of these companies have been beaten down as investor sentiment has swung back to the old economy. Neither fund is cloned as an internationally available investment fund, but the two managers combine to manage a Japanese portfolio for Credit Suisse’s institutional clients.
Fidelity Japan Fund, third over the year with a gain of 95% is available to international investors as the Luxembourg-domiciled Fidelity Funds Japan Fund and to UK institutional investors as the Fidelity Institutional Japan Funds unit trust and as a retail unit trust – although the funds do have different named managers. Managed by Brenda Reed, this $1.1 bn fund has a 26% allocation to technology. Top holdings included NTT, Softbank, and Kyocera. Its lower allocation to emerging growth stocks has seen reduced volatility compared to the Warburg funds, and the fund has fared less badly this year-to-date - down 8.94%, although still bottom quartile.
Fidelity Japan Smaller Companies – again available to international investors in similar form, returned 98.7% for the 12-month period, and has declined 15.25% year-to-date. The fund has around 25% in tech stocks, up considerably from it 18% weighting at in July 1999, but down from its year-end allocation. Manager Kenichi Mizushita holds names such as InterQ and Oracle Japan in the top 10, along with more familiar names such as Sony. In recognition of the increasing capitalisation of many JASDAQ stocks, Fidelity renamed the fund to Smaller Companies from Small Companies at the end of last year. Another one of the top performing funds, fourth over the year with a gain of 89.2%, second over three years with an annualised return of 36% and top over five years (up an annualized 17%) is Scudder’s The Japan Fund. Formerly a closed-end fund, this $980m vehicle is managed by Seung Kwak, who runs the Luxemburg-domiciled Scudder GOF Japan Equity along the same lines. Although the fund has a 30% allocation to TMTs, the style is broadly neutral. Top holdings feature a number of now familiar names – NTT, Sony and Kyocera.
David Masters is with Standard and Poor’s Fund Services in London

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