The past year has seen all comers in the sector get tarred pretty heavily. But the one lesson we keep taking away from this group is that it's hard to justify paying up for active management. In a down market, where you'd expect the ability of active managers to play defence to add some value, few covered them
selves in glory. Less than 25% beat the cheapest tracker in the sector, HSBC Japan Index, over the year ended 29 February, and fewer still have beat the tracker over the past five years. Given the risks inherent in Japan investing and the inability of most active managers to add value, we continue to think the HSBC offering is the best way to gain exposure to the country. That said, we recognise that not everyone will want to give up on the allure of active management. If you want to go that route, there are reasonable offerings in the sector to choose from.
Robert Rowland's Fidelity Japan offers exposure to the large-cap end of the market. It's backed by Fidelity's Tokyo-based research staff and has outperformed the HSBC tracker by a modest amount over the past five years. One possibility for concern is that Fidelity's Tokyo team is running a sizable pot of money, including funds available for sale in Canada and the US, Bermuda and Luxembourg domiciled offerings, and a portion of a large and very popular fund available to Japanese investors, Fidelity Japan Growth. Still, the fund's approach is sound--it's not the sort of offering that's likely to do brilliantly in any one year, but it has the ingredients of a solid core holding in the sector.
SG Japan and SG Japan Core Alpha have been run by Stephen Harker since 2006, to very good effect. Harker immediately repositioned both funds after taking over for former manager Neiloy Ghosh, moving into large-cap value oriented equities, and has since reaped the benefits as smaller-cap fare--especially the racier growth-oriented names, have badly underperformed. Harker has significantly outperformed the Fidelity offering and the index during his tenure, but that's a very short period of time, and one which has largely favoured his contrarian style. Investors considering this offering should note that when smaller-cap or growth-oriented companies lead the way, it's unlikely to shine as brightly.
It's also worth taking a moment to discuss Neptune Japan Opportunities. The fund has delivered a good three-year return despite being primarily focused on growth oriented mid- and small-cap issues. This suggests Chris Taylor's stock-picking has been strong--but a closer look shows something else may be at play. The fund held north of 20% of its assets in cash at the end of 2007, and the stake was in the mid-teens for most of the first three quarters of 2007. Moreover, its three-year record has been boosted hugely by its performance in the past three months, during which the fund rose 13.6%, compared to an average 5.5% loss for the rest of the sector's offerings. Whilst that's highly laudable, it's based on an extremely short period. It also concerns us that the fund appears to be offering returns that are the inverse of what one would expect from a Japan offering at this point. Despite its recent strength, then, we think a tracker or the two more-traditional offerings mentioned above are better choices for investors seeking general exposure to the region.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
