Investors look to Japan but funds struggle
While investors have recently piled into Japanese equities, most Japan-focused funds have not beaten the sector average since the start of the COVID-19 pandemic, according to data.
Last week, inflows into Japanese equities were at US$1.4 billion ($2 billion) which Bank of America labelled as “chunky”. The flows accounted for 0.2% of developed market fund flows for the week, which was the highest and followed by 0.1% for international equities.
A Matthews Asia analysis on Japanese equities said valuations were at the low end of their 10-year historical range, and many Japanese corporations had strong balance sheets and significant cash on hand.
“Japan's central bank announced plans to double exchange-traded funds [ETF] purchases in an effort to calm markets, which also supported the relative performance of Japanese equities compared to other developed markets,” it said.
“Reflecting monetary easing efforts around the globe, Japan's central bank is committed to providing liquidity.”
The analysis noted that while risks remained, Japanese equities might be attractively positioned relative to other developed markets.
“European equities are trading at a nearly 40% premium to Japanese equities in terms of price-to-book ratio, despite comparable return on equity levels. In addition, Japanese- listed companies have a record US$4.8 trillion of cash on their balance sheets. This cushion provides security in a tumultuous credit markets and upcoming recessionary environment,” it said.
“Finally, monetary policy remains constructive. The Bank of Japan in March announced an update of ETF purchase program from US$60 billion annual pace to having an option to increase to US$120 billion.
“From a structural point of view, we continue to believe the earnings capability of Japanese companies has improved meaningfully over the past economic cycle, driven by better corporate governance and a higher focus on capital efficiency.”
The analysis also said that multi-year trends such as productivity growth, health care, technology and material science innovation—where Japanese corporations excel versus global peers—remained intact.
“Against this backdrop, we are optimistic about opportunities for generating long-term alpha within Japanese equities,” it said.
While inflows have been strong, FE Analytics data has found that only one Japanese equity fund, within the Australian Core Strategies universe, had beat the Asia Pacific single country sector average since the start of the year.
All the funds’ performance plummeted in line with the global sell-off in mid-March, induced by the COVID-19 pandemic, and none have recovered to levels pre-pandemic.
The Asia Pacific single country sector recorded a loss of 7.01% since the start of the year to 31 May, 2020.
The top performing fund was BlackRock iShares MSCI Japan ETF at a loss of 0.95%, followed by Platinum Japan P fund at a loss of 7.3%, Platinum Japan C fund at a loss of 7.4%, and BetaShares Wisdom Tree Japan ETF Currency Hedged fund at a loss of 8.93%.
Japanese equity funds v sector performance since start of 2020 to 31 May 2020
Source: FE Analytics
The largest sector allocation for the Platinum Japan P fund was communications services (26.7%), followed by healthcare (14.6%), consumer discretionary (10.3%), information technology (8.3%), and industrials (7.4%).
Over a longer time horizon, the BlackRock fund was still the top performer over the three years to 31 May, 2020, at 21.3%, followed by Platinum Japan C at 13.2%. Both funds beat the Asia Pacific single country sector average of 8.97%.
The Platinum Japan C fund had the same allocations as the P fund.
The BetaShares fund came in last at 2.18%.
Japanese equity funds v sector performance over the three years to 31 May 2020
Source: FE Analytics
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