Why Include Japanese Mutual Funds In Your Portfolio?
Here are the primary factors favoring investment in Japanese mutual funds:
- Strong growth trajectory: Japan still has tremendous growth potential, especially compared to other developed nations, such as the U.S., where growth in this market cycle may have peaked.
- Rising profitability: Japanese corporations are catching up with their Western counterparts in profitability, with their return on equity (ROE) rising due to innovation, cost-cutting, and growing export sales.
- Low valuations: Japanese equities are trading at lower P/E multiples than historical averages and at a discount to other developed equity markets around the world.
- Improved corporate governance: A keen focus on shareholder returns and stronger internal controls has resulted in higher shareholder dividend payouts, stock buybacks, and higher corporate profit margins.
- Stable, pro-growth political environment: Japan has enjoyed a stable political environment, which makes it likely that the current pro-growth policies will remain in place over the coming years.
- Demographics-driven innovation: An aging population and low birth rates have spurred innovation in industries such as healthcare, robotics, and AI.
For a deeper look at these and other trends, see our guide to Investing in Japan.
How to Choose Japanese Mutual Funds
There are two main things you should consider in the process of choosing the right Japanese mutual funds: whether the fund is managed passively or actively and whether the fund is managed in-country or offshore.
Passive vs Active Management
Your first decision is whether to purchase passively or actively managed mutual funds. Passive (or index) funds do offer some advantages, such as lower cost. But when investing in businesses located in Japan, it’s smart to choose actively managed funds. Active managers perform in-depth, company-specific research to build a concentrated portfolio of Japanese companies they believe can outperform a benchmark and that can weather volatility and turbulent markets.
Active Japanese mutual fund managers can look “under the hood” to find and focus on high-growth companies. Major Japanese market indices, such as the Tokyo Price Index (TOPIX), is dominated by mature, old-school companies with limited growth potential - traditional manufacturers, financials, and telcos.
Asia-based or U.S.-Based Management
The fact is, Japan remains a mystery for many U.S. investors due to cultural, language, and other barriers. This makes “feet-on-the-street” research critical to uncovering the best and most timely investment opportunities for Japanese mutual funds. Fund managers and their research teams located in Asia can readily visit offices, plants, stores, suppliers, and customers throughout the region, which helps them uncover investment opportunities that might go undiscovered without a local presence.
Current Outlook for Japanese Mutual Funds
"We believe the hennessy Japan Fund is well-positioned as the portfolio is built around Japan's manufacturing excellence."
- MASA TAKEDA
In our latest commentary, Portfolio Manager Masa Takeda provides his thoughts:
• Japan’s government remains accommodative, growth-oriented, and business friendly, and we don’t expect that to change with the upcoming election of a new Prime Minister.
• A weaker Japanese Yen can be advantageous for globally oriented Japanese exporters and serve as a tailwind for overseas buyers.
• Japan valuations are attractive: the TOPIX traded at just 1.3x price to book, significantly lower than the S&P 500® Index, at 4.6x (as of 6/30/21).
• The Fund’s newest holding, Hitachi, has transitioned from a manufacturing-driven hardware sales model to a scalable solution-based model built around their proprietary Internet of Things platform.
• The Japan Fund is invested in companies that demonstrate Japan’s manufacturing excellence and high-quality craftsmanship along with asset-light technology businesses. Read our Sector Highlight: Japan's Most Durable Advantage
Read our latest portfolio manager commentary about the Japanese market and economy.
Actively Managed Japanese Mutual Funds
We encourage investors to compare all available funds to find the best Japanese mutual funds that match their investment objectives. Hennessy Funds offers two funds, both highly rated by Morningstar: the Hennessy Japan Fund and Hennessy Japan Small Cap Fund. To view the Morningstar ratings, please click here.
We believe Japan’s growth story is just starting to unfold and we believe that active management with a local presence in Asia provides an important advantage for investors interested in Japan. Both of the Hennessy Japan funds offer the opportunity to invest in the potential rebound of the Japanese economy. Here are a few highlights for both funds:
- Actively managed, concentrated portfolios. Through intensive, fundamental research, the portfolio managers limit investments to their best ideas, to give the best opportunity to outperform the market over the long-term.
- In-country teams. Based in Tokyo, our team has decades-long familiarity with Japan’s business landscape and unique corporate culture, which allows us to analyze day-to-day research and translate insights into winning investment ideas. Managers have access to real-time information about specific companies and investment opportunities, instead of relying on second- or even third-hand research and data.
- Concentrated portfolio. The portfolio managers focus on sustainable growth while limiting the downside by seeking Japanese companies with a durable competitive advantage. well-capitalized balance sheets and minimal debt, high ROE, strong cash flow, and an above-average earnings growth rate that is sustainable and predictable.
- High-conviction strategy. Due to their deep fundamental research and experience, the Hennessy Funds portfolio managers have the confidence to adhere to their proven investment strategies, and they manage the Funds for long-term results.