Funds to hold alongside the best Japan fund of the decade

FTF Martin Currie Japan Equity has made more than double the gains of its closest IA Japan rival over the past decade, but a disappointing 12 months may have left some investors questioning its future.

Over one year it has been the third-worst performer in the sector, losing 7.4%. This should be nothing new to investors, however, as the fund has gone through difficult periods before.

Between 2006 and 2009 it lost 74.6% of its value, which manager Hideo Shiozumi has in the past attributed to a shift away from his preferred small caps and a weakened yen.

Total return of the fund vs sector and benchmark since launch

Source : FE Analytics

The fund (which was formerly named Legg Mason Japan Equity) has been on an incredible run since then and has made 620.4% over the past decade, while its IA Japan sector and Topix benchmark are up 180.5 and 163.1% respectively.

Kamal Warraich, investment analyst at Canaccord Genuity Wealth Management, said he rated Martin Currie Japan Equity highly, adding it is a good option for investors that can tolerate high volatility.

“Double-digit maximum drawdowns are not unusual for this strategy, due primarily to its sector and stock-specific concentration. But on a risk-adjusted basis, this remains a standout option, as investors have historically been rewarded with high levels of upside exposure,” he said.

Laith Khalaf, head of investment analysis at AJ Bell, agreed, noting that it had “always been a feast-or-famine type of fund” with a “high-octane approach”.

However, some investors may also want a fund that performs well when the Martin Currie portfolio struggles.

“Investors looking to diversify may consider a fund with more exposure to larger Japanese companies,” Khalaf said, highlighting the iShares Japan Equity Index ETF as a broad market tracker that would sit well alongside this smaller-companies fund.

Rob Morgan, chief analyst at Charles Stanley Direct, said the specialist approach contrasted well with the majority of its peers, which focus more on the larger international Japanese companies.

“To balance this fund in a portfolio you would tend to look at something with a more high-quality and valuation-sensitive approach. I’d suggest LF Morant Wright Japan, which has a focus on balance sheet strength, evidenced by the fact that, on average, the fund’s holdings have net cash and investments of about two thirds of market cap,” he said.

The fund has gone through a lean spell, returning 5.8% over three years and has made just 19% over five years, which has affected its long-term performance figures, as the below chart shows.

Total return of the fund vs sector and benchmark over 10yrs

Source : FE Analytics

“In recent times it has been a dull performer, along with value strategies of all descriptions in Japan as growth and momentum have been favoured, but it has historically fared well in a relative sense when the market has been weak – so it makes a good pairing with an aggressive growth fund,” Morgan said.

Adrian Lowcock, an independent market commentator, said Man GLG Japan Core Alpha would also be a sensible option for similar reasons.

Jeff Atherton manages the highly regarded fund, which invests in companies that are unloved and undervalued.

“This contrarian approach starts by looking for companies that have been through a tough time and have depressed share prices,” he said. This strategy can take time to be recognised by the market, however, so patience with the portfolio is crucial.

Ruairi Dennehy, co-head of investment research at Fund Expert, said there was still great value and opportunity to be found in the Japanese market as a whole, as it is on a wide discount when compared with other developed markets.

Although the Martin Currie fund has been one of the most volatile within its sector, its performance has been “head and shoulders ahead of its peers”, Dennehy said, making it a strong long-term choice for investors.

However, he acknowledged that some investors would want to balance the violent swings of the fund. Those that are looking for options to hold alongside it could consider a broader Asia fund that included Japan

He added that they should look for strong long-term performance as well as lower volatility and suggested the Stewart Investors Asia Pacific Leaders Sustainability fund as an “interesting option”.

“The fund holds 12.5% in Japanese equities, but also provides investors some exposure to other emerging Asian markets such as India, Taiwan and China,” he said.