As part of its fund selector analysis on Japan, Morningstar has identified which funds to watch based on their three-year performance.
Henderson Horizon Japanese Smaller Companies has been managed by Yun-Young Lee since its inception in 2006.
The manager tends to focus on firms that fall within the bottom 25% of the Japanese market in terms of market cap. The fund invests in shares of Japanese smaller companies that are undervalued and appear to have greater potential to rise in price over the long term.
Lee takes advantage of market inefficiencies to identify businesses that are mispriced due to the lack of market information available for smaller companies.
Due to the underinvested nature of Japanese smaller companies, it is through company meetings that the fund is able to conduct proprietary research based on information that is not widely available in the market.
The portfolio tends to be invested in companies that benefit from the recovery in domestic capital investment and consumption.
It has been a consistent performer across most time periods, outperforming the Topix index, the Russell/Nomura Small Cap index and the Morningstar Small/Mid-Cap Equity peers.
Parvest Equity Japan Small Cap has a Morningstar Analyst Rating of Bronze. Although the fund is distributed by BNP Paribas Asset Management, it is managed by Sumitomo Mitsui Asset Management. Shunsuke Matsushima is lead manager, directly supported by Tadao Kimura and Kengo Kuzuhara, and a team of 19 equity analysts.
The basic investment principle is to invest in value stocks that have the potential to become growth stocks. Matsushima believes that low-profitability companies can transform into those with higher profitability and growth potential through various types of reforms, such as organisational restructuring or development of new products.
He also seeks mispriced growth situations. The approach tends to perform best in rising equity markets, when investors are willing to reward future growth potential, while the lower-than-average market-cap bias also influences relative returns.
Sparx Japan is managed by Sparx Asset Management, founded in 1989 and headquartered in Tokyo.
Lead manager Masakazu Takeda believes in buy-and-hold investing in quality and growth names. He tries to identify the best businesses in Japan that are leaders within their domestic markets and have a long, proven track record and strong management.
Additional criteria include simple and intelligible business models, well-capitalised balance sheets with little debt, durable competitive advantages, above-average return on equity and earnings growth that is sustainable, as well as strong cashflow generation.
Although the portfolio tends to be very concentrated, consisting of 25-30 holdings, it is well diversified across sectors and underlying businesses.
BL-Equities Japan has been managed by Steve Gold since its launch in June 2011.
The fund invests in Japanese equities and is not restricted in terms of market capitalisation. The investment philosophy of the fund is based on the principles of ‘business-like investing’. This means the manager considers every investment like a stake in a business with a long-term investment horizon.
The fund manager is on the lookout for quality companies with a tangible competitive advantage that results in high levels of profitability and strong potential for free cashflow generation. He believes such investments are likely to create long-term value for shareholders.
Great importance is also attached to company valuation. The fund only invests in a company when its share price provides a safety margin compared with its intrinsic value.
