Invesco Japan - looking for cheap companies in a cheap market
Dominic Rowles | Mon 28 January 2019
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- The managers look for companies ignored by others
- They've found plenty of opportunities in industries sensitive to the health of the Japanese economy
- We think other funds investing in Japan have better long-term prospects
Our view
Japan’s home to some outstanding companies, and their earnings have risen strongly in recent years. But our analysis suggests corporate earnings have risen faster than share prices. This could indicate growth potential as share prices have the potential to catch up with earnings.
Paul Chesson, lead manager of the Invesco Japan Fund, scours the Japanese stock market for companies overlooked by other investors but with the potential to do well in future. He’s invested in Japan for more than two decades and has the support of experienced co-manager Tony Roberts. Experienced managers who look for undervalued companies in an undervalued market is an attractive idea.
The fund's invested in relatively few companies. This means each one has the potential to contribute significantly to performance. The reverse is also true though so it’s a higher-risk approach.
We think this fund is a reasonable choice for exposure to the Japanese stock market but we currently have more conviction in other managers. The fund's beaten the performance of the broader Japanese stock market over the long run, but it's been a bumpy ride. And it's more expensive than our preferred options. You can see our favourite funds on the Wealth 50.
How’s the fund performed?
The Japanese stock market fell over the past year and the fund fell further. Our analysis shows the fund didn’t hold up as well as the broader sectors, and size of company, the managers typically invest in. This means their stock-picking held back returns. Past performance isn’t a guide to the future though.
One of the fund's worst performers was biotechnology company Sosei. Its share price fell heavily because of a number of issues, which include the suspension of trials for an Alzheimer's drug due to safety concerns. The managers think the company has good long-term prospects though.
The fund's beaten the Japanese stock market over the long term but performance has been volatile. Performance has been strong over shorter periods, but it's often followed by longer periods of weaker performance against the benchmark. We don’t think investors have been properly compensated for the risks taken.
| Annual percentage growth | |||||
|---|---|---|---|---|---|
|
Dec 13 -
Dec 14 |
Dec 14 -
Dec 15 |
Dec 15 -
Dec 16 |
Dec 16 -
Dec 17 |
Dec 17 -
Dec 18 |
|
| Invesco Japan | -3.1% | 15.0% | 25.1% | 11.9% | -12.0% |
| FTSE Japan | 2.7% | 17.6% | 22.7% | 14.4% | -7.6% |
Past performance is not a guide to the future. Source: Lipper IM to 31/12/2018
Where have the managers found opportunities?
Concerns about the health of the Japanese economy meant companies that rely on it have been overlooked by investors in recent years. The managers think many of their share prices have fallen to a level where they now look attractive. So recent investments have focused on this area of the market.
They currently like a number of banks. The managers think Japanese banks are more stable than they once were. Some have started to buy back their own shares which is seen as an indicator of financial health. Yet their share prices remain low and the managers think they have plenty of growth potential. Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial are some of the fund's largest investments.
They've also invested in some vehicle manufacturers. Their share prices have struggled recently because of concerns they could be affected by tariffs on goods exported to the US. Paul Chesson thinks the US President's attention is mainly focused on China, not Japan. The US government is already in discussions with Japan and promised not to implement any tariffs yet. Japanese car makers Toyota, Honda and Mazda are held in the fund.
The managers think there's less value in the technology sector, so little of the fund is invested here. Many Japanese technology companies have performed well in recent years and they think they've got less room to grow from current levels.