The deliberate devaluation of the Japanese yen has helped boost the earnings of exporters and has triggered a considerable rally in Japanese equities. This article looks at the best way to profit from a continued rise in the value of Japanese stocks.
The best way to profit from the rise of Japanese stocks
At the end of 2012 the Bank of Japan (BoJ) began to take decisive action to weaken the Japanese currency. Since then the value of the yen has fallen against all its major currency peers, a side effect of which has been a considerable rally in Japanese equities.
The lower yen is helping to boost earnings at Japanese firms that export cars, electronics, and other goods around the world. As the chart below shows, since the middle of November the Nikkei has risen by 35.5%.
A 1 year daily chart of the Nikkei (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
With the BoJ set to continue its weak yen policy, the question for investors is: what is the best way to profit from the rise of Japanese equities?
It is possible to simply buy an ETF that tracks the Nikkei, such as the popular iShares MSCI Japan Index Fund (EWJ), or place a spread bet on the index. However given the fact that not all of the 225 equities that make up the index are likely to perform well in a lower yen environment, an actively managed fund might make a better investment.
Baillie Gifford Japan Fund
Launched in October 1984 the Baillie Gifford Japan fund aims to, “pursue long-term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth”.
The fund is headed up by Sarah Whitley who has spent nearly 30 years investing in Japanese equities at Baillie Gifford. Whitley and her team select stocks via a bottom-up approach and describe themselves as “growth orientated, long term investors” who prioritise “the selection of individually attractive companies, rather than taking top-down industry bets”.
In December last year Morningstar analyst Szymon Idzikowski, described their rigorous stock selection process, noting that, “They target companies with favourable long-term earnings expectations and hold on until these have materialized… Their research extends beyond stock analysis as they also assess each company’s industry; for example, they examine whether it is well regulated and consider the pricing structure. Meeting with company management is also key. They try to evaluate corporate culture, management’s strategy, past stewardship, and how management’s interests are aligned with shareholders’”.
Whitley’s team believes that the Japanese economy is undergoing a structural transformation and that certain companies will be well positioned to benefit from this. The team assesses five factors when searching for companies to include in the portfolio. These are: industry background, competitive advantage, financial strength, the attitude of management, and valuation.
The team’s focus on sustainable profits growth has lead to a portfolio with a growth bias and a mix of large, mid, and small-cap names.
Top 10 Holdings
Hikari Tsushin 3.7%
Japan Tobacco 3.6%
Fuji Heavy Industries 3.0%
Mitsubishi Estate 2.9%
Mitsui & Co 2.9%
Don Quijote 2.6%
Konica Minolta Holdings 2.6%
1 Year: +16.60%
3 Year: +6.42%
5 Year: +7.36%
Ticker symbol: BGFD
Exchange: London Stock Exchange
Management Fee: 1.00% of Net Assets
Additional Fee: Ongoing Charge of 1.20% (2012)
Morningstar Rating: 5 stars
For more information click here.
WisdomTree Japan Hedged Equity Fund
For those investors who are based in the US and are concerned about currency risk, the WisdomTree Japan Hedged Equity Fund offers a decent alternative to the Baillie Gifford fund.
The WisdomTree Japan Hedged Equity Fund is an actively managed exchange-traded fund (ETF) that is incorporated in the US. The fund is designed to provide exposure to equity securities in Japan, while at the same time hedging exposure to fluctuations between the value of the US dollar and the Japanese yen.
The fund seeks to replicate the performance of the WisdomTree Japan Hedged Equity Index which consists of dividend-paying companies incorporated in Japan and traded on the Tokyo Stock Exchange. These companies must derive less than 80% of their revenue from sources in Japan. This ensures that the index is tilted towards companies with a more significant global revenue base.
Top 10 Holdings
Mitsubishi UFJ Financial Group 5.62%
Takeda Pharmaceutical Co Ltd 5.29%
Canon Inc 4.51%
Honda Motor Co Ltd 4.00%
Japan Tobacco Inc 3.36%
Mitsui & Co Ltd 3.26%
Nissan Motor Co Ltd 3.02%
Toyota Motor Corp 2.86%
Astellas Pharma Inc 2.62%
Itochu Corp 2.23%
1 Year: +19.44
3 Year: +1.94%
5 Year: -1.18%
Ticker symbol: DXJ
Exchange: NYSE Arca
Management Fee: 0.48%
Additional Fee: None.
Morningstar Rating: 2 stars
For more information click here.