There are 10 Japanese equity funds that have outperformed when markets are rallying, according to data from FE Analytics taken from the past five years.
As most of the developed world struggles to deal with rising inflation and withdrawal of central bank support, Japan has yet to encounter the same levels of inflation as other major economies.
The latest seasonally adjusted inflation figures from Japan came in at just a 0.9% year-on-year increase and a 0.5% increase from the previous month.
This is a stark contrast to developed markets such as the UK, the eurozone and the US which are experiencing inflation rates of 6.2%, 7.5% and 7.9% respectively.
As such, the Bank of Japan has not indicated that it will tighten monetary policy in the same way that other developed nations’ central banks might inevitably be forced to.
Despite this vastly different backdrop, Japanese equities have sold off broadly in line with the rest of the world – with the TSE TOPIX down 7.6% year-to-date compared to the MSCI World down 2.9%, in sterling terms.
Performance of TSE TOPIX & MSCI World year-to-date
Source: FE Analytics
However, if one believes that the recent sell-off could misplaced given the relatively benign inflation levels and more supportive central bank in Japan, recent weakness could be seen as a buying opportunity.
With this in mind, Trustnet took the 86 funds across the Investment Association’s Japan and Japanese Smaller Companies sectors and singled out the funds that outperform their peers when markets move up.
This was done by narrowing down funds with high upside capture ratios – which calculates the percentage of the market gains captured by a fund during periods of market strength.
Below are the 10 Japanese equity funds that have exhibited an upside capture ratio above 125, meaning they outperformed their peers by 25% or more when markets went up.
Source: FE Analytics
All of these 10 funds hold an FE fundinfo Crown Rating of three or above, which means they have delivered above average alpha, low volatility and consistently strong performance over the past three years at least.
The fund with the highest upside ratio was the FTF Martin Currie Japan Equity fund, run by Hideo Shiozumi. With an upside capture ratio of 190, it has outperformed its peers by 90% during up markets over the past five years.
But with high upside comes higher risk of downside, as measured by its downside capture ratio of 128 over the past five years. This means it has fallen 28% more than its peers when markets are falling.
Despite falling to the bottom quartile over the past year with a 25.8% decline, this fund remains top quartile over the past five years with a return of 38.1% to last month’s end.
It is worth noting that all except for one fund in the list above have exhibited a downside capture ratio over 100, meaning that they fell relatively more than their peers during declining markets.
The one exception is the GS Japan Equity Partners Portfolio, which has a downside capture ratio of 78 over the past five years, but an upside capture ratio of 127.
Run by Goldman Sachs Asset Management’s Ichiro Kosuge, the fund is up 83.6% over the past five years – making it the highest performer of all the Japanese equity funds over that time period.
However, the fund is down 13.1% year-to-date, but it is worth noting that all of the funds in the list above are down over 10% year-to-date with the exception of one small-cap fund.
This is because the correction in Japanese stocks has been relatively broad, as all except for two funds are negative year-to-date. The only two funds that are positive so far in the year are the Man GLG Japan Core Alpha fund and the Nomura Japan Strategic Value fund – both of which are value-orientated equity strategies.
The single small-cap fund that made the list above was BNY Mellon Japan Small Cap Equity Focus, managed by Kazuya Kurosawa. It had an upside capture ratio of 133 and a five-year performance of 53% - the highest in the 8-strong IA Japanese Smaller Companies sector.
Elsewhere in the list, there were two of the funds that are run by FE Alpha Managers – Comgest Growth Japan managed by Chantana Ward, Richard Kaye and Makoto Egami, as well as FSSA Japan Focus which is managed by FSSA managers Martin Lau and Sophia Li.
Both funds are orientated towards growth companies and as such have delivered top-quartile performance over the past five years. However, both have also dipped to the bottom-quartile over the past year on the back of the sell-off in growth stocks.