Japanese shares were hot in the 1980s, but the bubble has deflated mercilessly in the decades that followed. The high point that was reached in 1989 was never reached again. Especially funds in value shares seem to have fallen victim to the disinterest of investors in recent years. Now Japanese value stocks are hitting back.
Japanese value stocks in particular performed relatively well in 2021 and have continued to strengthen in the first two months of this year. The 1980s marked the heyday of the Japanese stock market.
At the beginning of 1980, the leading Nikkei 225 index was still quoted at around 6,500 points, but almost ten years later it reached its highest point ever at 38,957 points. At that time, the total market capitalisation of the Japanese stock exchanges represented around 45 percent of the worldwide total. Japanese shares were therefore worth more than, for example, American shares.
The rise of 500 percent in ten years caused sky-high valuations and thus a bubble, which deflated in the following years. Eventually, in both 2002 and 2008, the index would even plunge below 10,000 points.
Today, Japan’s main index is trading just above 27,000 points. Howver, investors have been left with an ambivalent relationship to the land of the rising sun after the rollercoaster ride.
Japan Large-cap
Funds in the Morningstar Japan Large-Cap Equity category, for example, still saw net inflows of around EUR 10 billion each year from 2013 to 2015, but in the years that followed, there were mostly outflows of investor money. This seems to have particularly affected the funds that invest in value stocks.
Of the 300 funds in the Japanese share class currently available in Europe, only 24 are of a value nature, according to the Morningstar Style Box. Moreover, half of those funds have less than €100 million under management, a limit that is generally accepted as the minimum of subsistence in the fund world.
In a global context, the aversion to value stocks among investors is not surprising. After all, the value style has been out of fashion in all regions in recent years. Investors have been particularly enamoured with growth stocks, with the result that growth stocks have outperformed and left value stocks far behind. Yet in Japan, the underperformance of the value style has apparently been less than elsewhere in the world.
Japan Value Index performed well
Over the past five years, the MSCI Japan Value index has lagged the MSCI Japan Growth index by 3.19 per cent a year. While this is a significant underperformance, it is much less than elsewhere. For example, the MSCI World Value index lagged the MSCI World Growth index by 8.60 per cent year-on-year, this was mainly driven by the underperformance of US value stocks which lagged by as much as 11.23 per cent compared to growth stocks.
The reason why Japan’s value stocks still have a somewhat mild underperformance over the past five years is due to the strong performance in 2021 and especially in the first two months of this year. Last year, value stocks outperformed growth stocks by 8.80%, and this year the trend has been reinforced with an outperformance of almost 16%. No other region in the world has such a strong performance in value stocks.
The question therefore arises as to whether investors in Japanese value stocks have thrown in the towel too soon.
Number 1: E.I Sturdza Nippon Growth
This week’s Top 5 lists the five best-performing funds (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar Japan Large-Cap Equity category, based on their performance over the past 12 months to the end of February 2022.
E.I Sturdza Nippon Growth had by far the highest return over the past 12 months at 22.17 per cent. Despite its name, this fund does not invest in growth stocks, but in value stocks. Since October 2009, the fund has been managed by an external manager, Evarich Asset Management, with the highly experienced Yutaka Uda at the helm. He takes an active approach based on sector allocation and stock selection.
Uda is not afraid to opt for a pronounced sector allocation, as evidenced by the fact that almost half of the portfolio is invested in industrial companies, while a quarter consists of financial institutions. His stock selection is also pronounced, reflected in a concentrated portfolio with only about 30 positions. Stock picks that contributed most to returns over the past 12 months include shipping companies Nippon Yusen Kabushiki and Mitsui Q.S.K. Lines.
Silver: Man GLG Japan CoreAlpha Equity
In second place is Man GLG Japan CoreAlpha Equity, which is the largest strategy in Japanese value stocks and has a Morningstar Analyst Rating of Neutral. Several members of the management team retired in 2020, including lead manager Stephen Harker. His role was taken over by the experienced Jeff Atherton.
This also brought about some subtle changes to the contrarian value-oriented process. For example, there is more focus on catalysts that can remove undervaluation. These changes did not alter the ultimate value character of the approximately 50-position portfolio. Among the best performing stocks over the past 12 months are Inpex and Nikon.
Number three is Eastspring Investments Japan Dynamic Fund, also rated Neutral. The highly regarded Dean Cashman will hand over the reins to Ivailo Dikov in April 2022. Although the new lead manager has 16 years of experience and has been part of the team since 2013, Cashman’s retirement is a major loss to the team.
The value-oriented strategy seeks to invest in companies that trade below one standard deviation on a price/earnings, price/book or dividend yield basis, relative to the past and the market. It also looks at sentiment among brokers and earnings revisions to help identify contrarian ideas. Again, Mitsui Q.S.K. Lines was among the standouts in the past year, followed at a distance by Ricoh.
This article originally appeared in Dutch at InvestmentOfficer.nl.
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