The TSE Topix index has climbed 31.99 per cent in just six months, according to data from FE Analytics, as investors react to an unprecedentedly large wave of quantitative easing [QE] in the country.
Performance of index over 6 months
Source: FE Analytics
However, analysts suggest that it could be the funds that invest in mid and small cap firms that will benefit the most in the coming months and years, despite having lagged the market recently.
Here are two relatively small funds that the experts say are set to grow and grow.
JOHCM Japan
Rob Morgan, investment analyst at Charles Stanley Direct, says that he likes the JOHCM Japan fund, which at £455m sits outside the top quartile of the sector for size.
"It’s not one of the better-known funds, but I really like it," he said. "It’s an all-cap fund so it’s small enough to explore the mid cap space and find deep-value opportunities."
"It’s done really, really well recently, not by having exporters but by having the next level down in terms of mid caps."
"Scott McGlashan is very experienced and has with that particular fund a vehicle with which he can explore the full range of the Japanese market."
"Some of the larger funds aren’t able to exploit the mid cap area, where potentially there’s even greater value to be found."
Data from FE Analytics shows that the fund is a top-quartile performer over one, three and five years, having made 47.96 per cent over the longer period.
Its Topix benchmark index made just 29.51 per cent in this time.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund slightly lagged the index in April, which the managers attribute to the outperformance of large caps in that time.
Morgan says that this is likely to reverse in the coming months as the money flows from large caps to cheaper areas of the market.
"With the wave of renewed interest in Japan, the larger companies have so far been the main beneficiaries."
"But as that interest matures, it is likely to broaden out into the lesser-known mid cap space where there’s very little research done by analysts, so there are opportunities for managers who have been doing that research to add a large amount of value," he said.
"I met with Scott McGlashan recently and he’s really quite excited at the moment."
The minimum initial investment on the fund is £1,000 and the ongoing charges are 1.41 per cent.
CF Morant Wright Nippon Yield
Bestinvest’s Jason Hollands thinks this £79m portfolio, which has five FE crowns, is well-set to prosper in the current Japanese market.
He explains that the expertise of the management team lies in the small and mid cap parts of the market.
"Japan has been the most interesting story in town since the start of the year, given the radical policy measures being introduced to expand its monetary base, halt the cycle of deflation, weaken the yen to improve the competitive position of its exporters and reform its corporate sector," he said.
"The starting point for these reforms was a market that had totally bombed out valuations, where many companies were trading below book value just six months ago."
"While we have been principally backing big-name investors such as Stephen Harker, manager of the large cap value-biased GLG Japan Core Alpha fund, and the Schroder Tokyo fund managed by Andrew Rose, one of the more interesting but less high-profile fund stories in the Japanese market is CF Morant Wright Nippon Yield."
"Morant Wright is a boutique manager exclusively focused on Japan. The founders, Stephen Morant and Ian Wright, were respectively heads of the Japanese desks at Cazenove and F&C."
"The team also includes the likes of Denis Clough, former manager of Schroder Tokyo, so these are veteran investors, not young rising stars, but the Morant Wright banner is not a household name."
"Morant Wright have a value bias and strong expertise in small and mid cap companies, so their funds would sit well alongside the likes of GLG Japan Core Alpha in a portfolio and should not just be seen as an alternative."
"Unlike their flagship CF Morant Wright Japan fund, which is over £600m in size, the CF Morant Nippon Yield fund is a relative minnow at £79m, which we see as potentially advantageous in terms of its ability to invest in smaller stocks and trading liquidity."
"More than half the fund is currently invested in smaller companies."
Data from FE Analytics shows that the fund is another to have lagged slightly in recent months.
Over the past year its returns of 32.34 per cent are marginally down on the 33.05 per cent made by the TSE Topix.
Being heavily invested in small caps is likely to have caused this, although Hollands notes it is quite defensive in style.
It beat the TSE Topix in 2009, 2010 and 2011.
Over three years it has made 42.91 per cent compared with 21.51 per cent from the index and 24.77 per cent from the average fund in the sector.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Hollands points out that it has added appeal to income investors.
"As the name suggests, there is a yield aspect to the fund, which currently has a running yield of 3 per cent."
"The focus on value and dividend discipline means the fund is relatively more defensive than some of the racier, more growth-orientated small cap biased Japanese funds such as Legg Mason Japan Equity."
The fund is available with a minimum initial investment of £5,000 and has ongoing charges of 1.93 per cent.
