Is that actually happening? Recent analysis by Copley Fund Research provides some answers by looking at the weightings to Japan in a set of Global Equity Funds.
Firstly, the average fund has been underweight to Japan, compared to the MSCI ACWI, for the past decade, but the spread between the average fund weighting and the index weighting has closed over five years and is at its tightest since 2014.
Another stand out is the proportion of funds that have exposure to Japan. The proportion of global equity funds investing in Japan hit its lowest level approximately 12 months ago, but since then has bounced back sharply, from a low of 84.9% to 87.1%.
However, exposure to Japan is markedly different depending on style; value funds are overweight on average, whereas income funds and growth investors are both underweight.
Top down analyses like this can capture data that isn’t entirely accurate, mainly because classifying funds can be an exercise in trying to square a circle. For example, the British & American Investment Trust (BAF), as readers can likely infer, invests in US and UK companies and is benchmarked against the FTSE All-Share. However, it is part of AIC’s Global Equity Income Sector.
Nonetheless, Copley’s research into funds globally, seems to fit broadly with trends in the UK’s investment trust sector.
For instance, every trust in the AIC’s Global Equity Income sector is underweight Japan, reflecting the relatively low dividend payouts Japanese companies offer.
In contrast, several in the AIC’s Global sector are overweight Japan. For instance, Bankers (BNKR) upped its weighting from 7.4% in October last year, to 13.4% in May. That coincides with the managers tilting the portfolio more towards value, after a decade-long period focused on growth.
AVI Global (AGT) is probably the most notable trust in the sector when it comes to Japan, with a 19% weighting to the country. However, the trust managers are Japan specialists and take a differentiated, value-driven approach. A key part of the strategy is to invest in what the managers believe are undervalued investment trusts trading at a discount, and capture the enhanced returns that a tightening of the discount produces.
The tilt towards Japan in value funds also mirrors some of the success we’ve seen in country specialist trusts. For instance, AVI Japan Opportunity (AJOT), managed by the same company as AGT, also takes a value-driven approach to Japanese Smaller Companies and has enjoyed a strong 12 months compared to its benchmark.
Similarly, CC Japan Income & Growth (CCJI) has had a very strong 12 months. The managers invest in companies that can pay increasing, sustainable dividends, and have benefitted from some of the corporate reforms we’ve seen in Japan over the past decade.
For investors considering Japan, CCJI arguably offers a more attractive approach today; valuations in Japan do look attractive and corporate reforms, as well as modest inflation levels, continue to act as a tailwind for investors. However, stylistic calls remain hard to make and the balance that CCJI offers – valuation-conscious but not pure value plays – may be the better choice to make today.
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