Japan is unloved, under-owned and most importantly undervalued

Five of the top 10 performers out of 1,965 unit trusts this year so far are Japan funds, but the sector is shunned by investors.

 

By Ian Cowie
Published: 10:18PM GMT 11 Mar 2010

Now here's a funny thing. Five of the top 10 performers out of 1,965 unit trusts this year so far are Japan funds, but the sector is shunned by investors. While individual savings accounts (Isas) as a whole enjoyed their biggest-ever inflow last month, investors took £503,000 more out of Japan Isas than they paid in.

Not that this mismatch between very short-term returns and popularity should come as any surprise. As the graph on this page demonstrates, the Nikkei 225 index has been stuck in a 20-year sulk while the FTSE 100 has powered ahead. 

But that has not prevented some fund managers making handsome profits in Japan, due to shrewd stock-picking and the way the yen has strengthened against the pound. Now some contrarians claim the currency is set to unravel and this will be the long-awaited key to rekindle the profitability of Japan's exporters.

This is a counter-intuitive and complex strategy based on Japan's new government, soaring debt (much worse as a percentage of gross domestic product than that of Britain or Greece), its ageing population and collapsing savings ratio. 

After so many false dawns over the past two decades, could things really be looking up in the land of the rising sun? Could the world's second-biggest economy see share prices rise from their current level, three quarters lower than their peak in 1990? 

All things considered, this was an interesting time to go and see for myself. My host in Tokyo, Chris Taylor, fund manager of Neptune Japan Opportunities, a UK-based open-ended investment company, has taken big bets here and won before. In 2008 he shorted the country's banks before they hit the buffers and delivered returns of more than 80pc to sterling investors, during a year in which the Nikkei fell by 40pc.

But swimming against the tide is not easy and hedging the yen backfired last year when this fund could only edge forward by 7pc. Even so, Mr Taylor remains the top performer in Japan over three and five years. He is not alone in favouring this country as the next opportunity to demonstrate that the best way to make big profits is to buy before the herd arrive.

Gartmore recently launched a Japan Absolute Return fund and GLG, PSigma, Skandia and Threadneedle are all increasing their exposure to Japan.

Tom Becket, chief investment officer at PSigma, said: "Investors have chosen to ignore Japan's geographic location on the dragon's doorstep, which allows huge opportunities for Japanese companies to benefit from Asian growth.

"One of the key investment lessons of the past few years is that you make the serious cash by betting against the rest. Japan is unloved, unfashionable, under-researched, under-owned and – most importantly – undervalued." 

Similarly, Ian Burden, head of the Japan desk at Threadneedle, claims: "Although a weaker yen would reduce returns for an unhedged overseas investor, it would provide further earnings leverage to our expectations for the export sector, while moving the domestic economy towards recovery."

http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/7424374/Japan-is-unloved-under-owned-and-most-importantly-undervalued.html