Five Japan Equity Funds Morningstar Analysts Are…

We see evidence that these reforms are well and truly taking hold, but we think there is more to do. This story has not yet fully played out and is expected to be one of the major drivers of Japan equity performance in the coming five to 10 years. Shareholder returns are being prioritised. Company boards are being improved. Non-productive assets are being sold. Special situations abound.

Elsewhere, a return to inflation is hugely significant, and in time may prompt a long-awaited return to a virtuous cycle of consumption and economic growth. Naturally, there are risks, so it it would be naive to think recent change will lift all boats. Changes in the economy and corporate governance landscape are not impacting all companies equally.

We are cognisant, therefore, that fractious markets might cause trepidation for prospective investors. As long-term investors, such bouts of volatility leave us unphased, however. Broadly speaking, fundamentals remain strong. There are causes for long-term optimism, and particularly for active fund managers.

We think there are strong reasons to consider Japan a stock-picker’s market. Good active management should position portfolios away from stocks that are adapting more slowly to ongoing governance reforms. Nevertheless, investment styles and related factor premiums are important. This supports the case for a more balanced approach to Japanese equities: a blend of a growth- and value-biased fund, or an all-in-one, more core-like approach. Below we present a handful of compelling Japan equity funds.

MAN GLG Japan CoreAlpha

In the large-cap value space, we draw attention to Man GLG’s Japan CoreAlpha fund. We see positives stemming from the combination of a well-structured, contrarian value investment process and the continuity provided by veteran portfolio manager Jeff Atherton, who took the mantel in January 2021. Since he took over as lead portfolio manager, he has made some important process enhancements, which have been applied to good effect. There is now a greater appreciation of catalysts that help drive rerating, including metrics such as return on equity and earnings quality, as well as corporate governance changes. These changes play directly into many of the themes discussed in this article.

Key Morningstar Metrics for Man GLG Japan CoreAlpha

• Morningstar Medalist Rating: Bronze
• Morningstar Star Rating: ★★★
• Fund Size: £2.2 billion
• Morningstar Category: Japan Large-Cap Equity
• Ongoing Charge: 1.65%

J.P. Morgan Asset Management Japan Equity

For large-cap Japanese growth equities, there are a number of strong options. We acknowledge many funds that invest in this area of the market have suffered from weak relative returns in recent years given the extreme market dynamics previously discussed. We stay long-term, but, where appropriate, have updated our views. On a forward-looking basis, we see optimism from many secular growth opportunities, which persist in areas relating to Asian premiumisation, automation, and online companies. We think growth-biased funds continue to serve a role for those looking to offset the style biases from a pure value fund. Here, we highlight J.P. Morgan Asset Management’s Japan Equity fund.

This fund benefits from a top-notch lead portfolio manager, a well-resourced supporting team, and a time-tested investment approach. The well-codified, quality-growth investment approach is long-established and has also been employed successfully across related JPM Asia-Pacific and JPM Emerging Markets equity strategies. Lead portfolio manager Nicholas Weindling has managed this strategy since 2007. He adheres to the strategy’s long-standing growth-oriented approach through various market environments and is unfazed by shorter-term headwinds. He has an impressive track record across multiple market cycles. This is one of the most well-resourced Japan-dedicated equity teams under our coverage, and the manager fully uses his best ideas and is often willing to pay high multiples for them.

As such, the portfolio’s average expected growth and return on equity, as well as its valuation, have consistently been markedly higher than the Topix. The approach has delivered solid long-term results, although it may also result in lumpy and volatile results at times, amplified by the strategy’s salient growth tilt. Indeed, the strategy faced severe stylistic…