iShares Japan Equity Index: April 2021 Fund Update

Alexander Watkins | Fri 30 April 2021

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• BlackRock is the largest asset manager in the world
• This fund provides low-cost exposure to over 500 Japanese companies
• It’s closely tracked the FTSE Japan Index since launch
• The fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Japan is home to some of the best-known businesses on the planet. Toyota, Sony, and Nintendo to name a few. This fund offers a low-cost way to invest across the Japanese stock market, in companies of all sizes and across a variety of industries. We think this fund could help diversify a global portfolio, or be a good addition to a portfolio of tracker funds.

Manager

Kieran Doyle is a Senior Portfolio Manager in BlackRock's Institutional Index Equity Team. He's been part of the team since 2004 and officially became the fund's manager in 2016, although in practice, the entire team helps to run the fund.

The group has investment managers and analysts based across the globe, helping drive more efficient management of their funds. We have conviction in their ability to provide simple and effective tracking options for investors.

Process

The fund aims to track its benchmark, the FTSE Japan, by investing in every company in the index, and in the same proportion. This is known as full replication.

Keeping costs low is a key part of the team’s strategy to track the index closely. The portfolio managers communicate with teams in Japan to ensure trades are placed at the best price, helping keep costs low.

The fund also has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is closely following the index.

Approximately 4% of the fund invests in smaller companies. They have greater growth potential than their larger peers but can experience more extreme price movements. This can benefit the fund in the long term but adds risk.

The fund can lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs lower. Since BlackRock’s lending programme started, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients. Although stock lending is not without risk.

Culture

BlackRock is one of the largest asset managers in the world. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

They have lots of resource and knowledge under their belt, BlackRock aims to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock considerable access to the marketplace, which can help reduce trading costs.

Employees at BlackRock are encouraged to hold shares in the company. The company is committed to broadening employee share ownership and offers an employee stock purchase plan to help achieve this goal. For passive funds, the managers are incentivised to track the index as closely as possible. We think this helps align the company’s interests with its long-term investors.

Over recent years BlackRock has increased its drive towards stewardship and promoting Environmental, Social and Governance (ESG)-based products. This involves direct dialogue with companies on governance issues that have a material impact on sustainable, long-term financial performance. While the iShares Japan Equity Index Fund isn't an ESG-specific fund, we think it’s positive that BlackRock as a group is taking an active approach to stewardship issues.

The team running this fund works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

Cost

The fund has an ongoing annual fund charge of 0.08%, We believe this is an excellent charge when compared with other passive funds in this sector. This is also the lowest cost fund on the HL platform for passively tracking the Japanese market. Our platform charge of up to 0.45% per annum also applies.

Performance

Since Launch in July 2005, the iShares Japan Equity Index fund has tracked the FTSE Japan well, returning 177.1%* versus the benchmark’s 195.0%. Remember, past performance isn’t a guide to future returns. As expected from index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, this difference has been reduced due to the strategies used by the BlackRock team.

The FTSE Japan’s top 10 companies account for 20.2% of the total index. How these companies perform in the future will play a big part in the performance of the underlying index and fund.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE Japan well in future, though there are no guarantees.

A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others. On occasion it has even ended up slightly ahead of the index due to the strategies used by the team, although this won't necessarily happen in future and isn’t an aim of the fund.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021.

iShares Japan Equity Index factsheet, including charges

iShares Japan Equity Index Key Investor Information