Our columnist explains why things are looking up for this market following several false dawns during a series of ‘lost decades’.
For the first time in 30 years, the best-known benchmark of Japan’s stock market burst through the psychologically significant 30,000 level this week. The Nikkei’s new peak matters, sad to say, because quite a few long-term investors in the world’s third-largest economy died waiting for this day.
Half a lifetime ago, nobody I spoke to thought recovery would take this long. Japan had dominated equity investors’ thoughts for most of the 1980s, and even managed to keep going after American and British markets collapsed in 1987.
For a brief period towards the end of that decade, the grounds of the Imperial Palace in Tokyo were said to be worth more than all the real estate in California. Then the music stopped and decades of disappointment led many British investors to forget all about this Asian powerhouse, despite it remaining a world leader in several areas of technology; especially artificial intelligence and robotics.
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When I was lucky enough to visit Tokyo on business a few years ago, I was impressed by the city’s entrepreneurial spirit and wealth of intellectual property - if not the uncooked fish. More recently, I am glad I reminded interactive investor’s readers about opportunities here last June when I said: “After a few fallow years, characterised by low or no returns, one of my longest-held and biggest investment trusts is bouncing back strongly.
“Shares in this smaller companies specialist have surged by a remarkable 58% in the last three months, but it has attracted relatively little attention, perhaps because it is invested on the other side of the world.
“Baillie Gifford Shin Nippon (LSE:BGS) - or ‘new Japan’ - focuses on that country’s more entrepreneurial firms, rather than its better-known very big businesses. This niche has not proved immune to the coronavirus crisis with negative returns - or, in plain English, losses - of 3.3% over the last year.
“But BGS remains worth a second look. Despite strong medium to long-term performance, the trust’s shares continue to be priced 4% below their net asset value (NAV).”
Since then, the shares have surged by 29% in the last six months and now trade at a modest premium of 3% to their NAV, according to Morningstar. BGS remains the top performer in the Association of Investment Companies (AIC) Japanese Smaller Companies sector over the last year, five years and 10 years, with total returns of 47%, 208% and 597%, respectively.
It is also a top 10 holding by value in my ‘forever fund’. However, the absence of any income from BGS has always niggled this investor, whose priority is preparing to fund retirement.
So, I diversified into JPMorgan Japan Small Cap Growth & Income (LSE:JSGI) in December 2019, when the shares cost 431p and yielded 4.3%. Now they trade at 544p and yield 3.5% after delivering total returns of 35%; 159% and 292% over the usual three periods.
To return to where we began, some Tokyo blue-chips have done even better than its tiddlers. The AIC’s Japan sector is up 39% over the last year, compared to the Japanese Smaller Companies sector’s average return of 35%.
More specifically, JPMorgan Japanese (LSE:JFJ), a giant with total assets of £1.3 billion, leads its sector with a total return of 60% over the last year. It also delivered 202% and 330% over the last five and 10 years, respectively.
Interestingly, JFJ’s top 10 holdings include Keyence, which specialises in robots or industrial automation; Hoya, the medical technology group; and Nintendo, the biggest video games producer in the world.
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Not many people know this, but Nintendo was founded in Kyoto in 1889. So it has survived both world wars, not to mention two atomic bombs.
That’s the kind of resilience I like, but Japanese withholding tax would be no fun at all. So, I invested via American Depositary Receipts (ADRs) in Nintendo (NTDOY) at $73 last month to gain exposure to this growth sector and a yield of 2.5%.
Filling in the single-sheet form W-8BEN avoids all withholding taxes on foreign shares held in a self-invested personal pension (SIPP), which is what I have done with this portion of my portfolio.
Investment trusts remain a simpler way to gain wider exposure to exotic markets at very reasonable cost. For example, BGS levies annual fees of just 0.73%; JFJ charges 0.66% and JSGI levies 1.14%.
At last, after several false dawns during a series of ‘lost decades’, shares are looking up in the Land of the Rising Sun.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie owns shares in Baillie Gifford Shin Nippon (BGS); JPMorgan Japan Small Cap Growth & Income (JSGI) and Nintendo ADRs (NTDOY) as part of a diversified global portfolio of investment trusts and other shares.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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