HSBC Japan Index fund is one of the very best trackers in a category in which passive funds have performed well. The fund offers broad and representative cap-weighted exposure to Japanese large-cap equities. With around 500 constituents, including a number of mid-caps and small caps, the FTSE Japan Index stands as a better proposition than the more popular but narrower MSCI Japan Index. With an ongoing charge of only 0.21%, the clean share class of the fund is one of the cheapest in the Japan large-cap Morningstar Category.
The yawning fee gap between this fund and that charged by the average fund in the category has proved to be a formidable hurdle for active managers. The low fee, coupled with an underperformance of active managers, has seen the fund clearly outshine its surviving category peers over three, five, and 10 years when ranked on a risk-adjusted basis.
We don’t expect the fund to exhibit tight tracking performance because of its use of fair valuation. This mechanism is used to price a fund when the underlying markets are closed. The fund’s "fair value" at midday (UK time) reflects market events that have transpired since the close of the Japanese markets. But because the benchmark makes no such adjustments, it is a source of both tracking error and tracking difference – fund return less index return.
Despite enduring several personnel changes over recent years, we retain a positive view of the index investment team, which remains well staffed with industry veterans.
It is important to note that this fund is not currency-hedged and that future returns will depend upon the potentially volatile yen/pound relationship. Our strong conviction surrounding this fund is built around the broad and representative market exposure offered, its low fee structure, and evidence that active managers struggle to add value within the Japanese Large-Cap category. For these reasons, this fund has been awarded a Morningstar Analyst Rating of Gold.
