Japanese markets were perhaps the real surprise of 2013 as the country pulled itself out of a two decade-long economic mire and surged back to growth.
Since the start of the year, the benchmark Japanese index, the Nikkei 225, is up 23.32 per cent.
Year-to-date performance of index
Source: FE Analytics
Cockerill (pictured) says that the Japanese Smaller Companies fund run by boutique group Baillie Gifford is his fund of the year after a period in which its focus on long-term, dependable companies came to fruition.
“I picked the fund because Baillie Gifford are a very conservative investment house. We’ve been holding the fund for about two years,” he said. “I picked it because while Japanese smaller companies can be horribly volatile, the flip side is if you get it right, you can do really well. But I didn’t want to take too much risk, which is why I selected the Baillie Gifford fund.”
“They’ve had a really good year. The fund did better than I thought it was going to do. At the beginning of this year I wouldn’t have said that’s going to be our best performer over 12 months.”
Cockerill says he likes the consistency and stability of Baillie Gifford’s fund management style. The boutique Edinburgh-based asset manager has a reputation of retaining good managers over the long-term, which Cockerill says gives him more confidence to trust how a manager will perform over a cycle.
The £110.8m fund, run by FE Alpha Manager John MacDougall, has had a stellar year, outperforming every other fund in the IMA Japanese Smaller Companies sector apart from the Invesco Perpetual Japanese Smaller Companies fund.
Year to date, the fund is up 41.74 per cent, nearly doubling the returns of its benchmark, the MSCI Japan Small Cap index and well ahead of the sector, which averaged 33.13 per cent.
Year-to-date performance of fund vs sector and index
Source: FE Analytics
Though the fund is not benchmarked against the Nikkei 225, it nearly doubled the returns of that measure as well.
The tiny fund has held up over the longer term too, having beaten the sector and index substantially over one, three, five and 10 years.
Over five years the fund more than doubled the returns of the MSCI Japan Small Cap index, gaining 109.85 per cent. It was more than 30 percentage points ahead of the sector over that period.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
As one might expect, the nature of the fund’s market cap tilt does mean it is more volatile than those investing in larger companies in Japan, but not as much as one might think.
Over the last five years, the manager has done a good job keeping a lid on volatility, highlighting one of the key reasons Cockerill said he picked the fund over others in the sector in the first place.
Over five years, the Baillie Gifford Japanese Smaller Companies fund has an annualised volatility score of 18.26 per cent, only slightly more than the IMA Japanese Smaller Companies sector, which scored 17.82 per cent over the period. By comparison, the IMA Japan sector had annualised volatility of 16 per cent over five years.
The manager is backing consumer products companies, with 34.4 per cent of the portfolio invested in the sector. Telecommunications, media and technology stocks are the next highest weightings, followed by industrials.
MacDougall is invested in familiar names like Next, which is the top holding in the portfolio. Among his top-10 are Japanese M&A brokerage firm Nihon M&A Center, Asian financial services company Japan Exchange Group and childcare and nursing products firm Pigeon Corp.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.59 per cent.
Cockerill is bullish about the Japanese economy as a whole, saying it could outperform all other developed markets in 2014, and as a result the Baillie Gifford Japanese Smaller Companies fund will continue to rally.
“It seems to be for once in Japan there is a genuine will to make structural changes. If the reforms promised in Japan happen, the fund will continue to do quite well,” he said.
“If everything goes according to plan, Japan would be a very good market next year, even better than the US and UK.”
Chelsea Financial’s Darius McDermott agrees with Cockerill’s view. In a previous FE Trustnet article, the managing director said he was continuing to back a Japanese rally into 2014.
However, Old Mutual Japanese Equity fund manager Ian Heslop recently told FE Trustnet that investors should be wary of an ongoing rally in Japan, saying that unless there is greater structural reform, Japanese equities won’t be able to keep up with their rapid 2013 rise.
