Huge flows into Japanese equities but losses for funds
Despite global flows into Japanese equity funds being positive for the 18th time over the past 22 weeks, there were no Japanese equity funds domiciled in Australia that had made a return since the beginning of the year.
Bank of America (BofA) data found that there were US$1.9 billion ($2.7 billion) in flows that went into Japanese equity funds last week, the second largest behind US equity ($4.8 billion).
Japanese equities also topped the charts when it came to the bank’s private clients in terms of flows over the past month. This was followed by precious metals, Treasury inflation-protected securities, municipal bonds and investment grade bonds.
According to FE Analytics, within the Australian Core Strategies universe, since the start of the year to 30 June, 2020, there were no Japanese equity funds that had made a return.
The best-performing fund was BlackRock iShares MSCI Japan ETF at a loss of 4.7%. This was followed by BetaShares WisdomTree Japan ETF Currency Hedged (-5.06%), Platinum Japan C (-11.45%), and Optimal Japan and Asia Trust S1 (-14.21%).
Platinum’s portfolio manager, Scott Gilchrist, said in the Japan fund’s quarterly report that the Japanese stockmarket had been falling for two and a half years.
“Disruption to business operations and markets is growing. COVID-19 has exposed this, and accelerated the changes in many cases,” he said.
“Half of the composition of the Japanese stock market has been listed in the last decade. This is not an outlier and will continue, as the old get sloughed off and the new rise. It’s tempting to think that the world will return to ’normal’, but it never has.
“These widespread and fundamental changes are broadly recognised and accepted as reflected in the valuations many are willing to pay for future growth and profits.”
He noted that corporate activism in Japan had been accelerating in recent years and there were abundant opportunities.
The Platinum fund’s largest sector exposures were to communication services (25%), health care (14%), consumer discretionary (11%), information technology (8%), and industrials (6%).
Performance of Japanese equity funds versus indices start of 2020 to 30 June 2020
Source: FE Analytics
Gilchrist said that the fund had been positioned both conservatively and with a view that the valuation dispersion would tighten.
“In the background is the influence of disruption and deflation. Unfortunately, positive contributions from fast-growing, innovative companies like Nexon (+38%), Nintendo (+15%), GMO Internet (+64%) and CyberAgent (+26%) have been offset by defensive positioning of a significant part of the portfolio and losses on short positions in companies, which were valued near record levels and rose to record levels,” he said.
Over the three years to 30 June, 2020, there were no Japanese equity funds domiciled in Australia that beat the MSCI Japan (21.6%) or the FTSE Japan (20.93%) indices.
The BlackRock fund was again the top performer at 19.56%, followed by the Platinum fund at 9.8%, BetaShares at 0.53%, and Optimal at -45.6%.
Performance of Japanese equity funds versus indices over three years to 30 June 2020
Source: FE Analytics
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