A Beginner's Guide To Mutual Funds In Japan

Japan is one of the world's largest and most productive economies, making it an attractive investment target for mutual fund managers. The country's strong position in the world market, stable political environment, and compelling valuations make it an excellent investment opportunity. Japanese corporations are also catching up with their Western counterparts in profitability, with their return on equity (ROE) rising due to innovation, cost-cutting, and growing export sales. Additionally, Japan's improved corporate governance has resulted in a stronger focus on shareholder returns, leading to higher dividend payouts and improved profit margins.

When considering how to invest in mutual funds in Japan, it is important to weigh the benefits of passive versus active management. While passive management offers advantages such as lower costs, active management allows for a more concentrated portfolio of high-growth Japanese companies that can outperform a benchmark and weather volatile markets. Furthermore, local presence and in-country management are crucial when investing in Japan due to cultural and language barriers.

With the range of mutual funds in Japan better than ever, investing in Japanese mutual funds can be a smart decision.

Low fees and convenience

Mutual funds in Japan offer several advantages, including low fees and convenience. The range of mutual funds in Japan is better than ever, making it an attractive option for investors. Here are some key benefits:

Low Fees

• No Purchase or Redemption Fees: You can find mutual funds with no purchase fees and no redemption fees (look for ノーロード 'no load' funds). This means you don't pay any extra charges when buying or selling shares.
• Low Annual Costs: Mutual funds in Japan typically have relatively low annual fees, allowing you to invest with minimal ongoing costs.
• No Currency Exchange Fees: You can buy mutual funds in Japanese yen, avoiding the need to incur fees for converting your money into US dollars.
• Low Minimum Investment: Some mutual funds in Japan have a very low minimum investment requirement, such as the Commonwealth Japan Fund, which has a minimum initial investment of $200.

Convenience

• Flexible Dividend Options: With mutual funds, you usually have the choice to receive dividends (受取型) or reinvest them (再投資型) to potentially grow your investment further.
• Regular Investments: Many brokers offer the convenience of setting up regular investments (積立), where they will automatically invest a set amount each month from your bank account. This allows for a "set it and forget it" approach to investing.
• Easy to Buy: Mutual funds can be purchased through reputable trading platforms such as Rakuten Securities (楽天証券), SBI (SBI証券), and Monex (マネックス証券). These platforms offer a wide range of mutual fund options, making it convenient to explore and choose suitable investments.
• Low Unit Cost: Mutual funds can often be bought in lots of 1 yen, which is significantly lower than the unit cost of buying individual stocks or ETFs.
• Anytime Purchasing: You can buy mutual funds at any time, and the orders are processed once a day.

Additionally, when investing in Japanese mutual funds, it's important to consider the active vs. passive management and the location of the fund management team. Actively managed funds tend to be preferred for investing in Japan due to the need for in-depth knowledge of local companies and the unique cultural and language barriers. Having a management team based in Japan or Asia can provide valuable insights and access to local companies.

When choosing a Japanese mutual fund, it's also worth considering the size of the companies in the portfolio. Some funds focus on larger, established companies, while others concentrate on smaller firms with potential for growth. Ensure you review the fund's investment objectives and strategies to align with your investment goals.

Strong growth trajectory

Japan still has tremendous growth potential, especially compared to other developed nations, such as the US, where growth in this market cycle may have peaked.

The Japanese economy has been on a strong growth trajectory, with significant policy and structural reform initiatives shaping its future economic growth. The country has the third-largest economy in the world and comprises approximately 6% of global GDP.

One of the key areas of change is improved corporate governance. Government-led reforms have caused companies to focus more on shareholder returns, resulting in higher dividend payouts, stock buybacks, and higher corporate profit margins. This has been supported by the initiation of Japan's "Stewardship Code", which is part of the Abenomics economic policies. These policies, instituted by former Prime Minister Shinzo Abe, also focused on weakening the yen and increasing inflation to 2%. As a result, the Japanese economy exited deflation for the first time in two decades, and the return on equity (ROE) of Japanese stocks has almost doubled since 2012.

Another factor contributing to Japan's strong growth trajectory is demographics-driven innovation. An aging population and low birth rates have spurred innovation in industries such as healthcare, robotics, and AI. Japan is an undisputed leader in robotics and automation, with five of the top 10 producers in the world. These companies have benefited from strong demand growth, particularly in the Asian market, the world's largest end market for factory automation products.

Furthermore, Japan has a stable, pro-growth political environment, which makes it likely that the current policies supporting economic growth will remain in place over the coming years. Prime Minister Fumio Kishida has continued to prioritize economic reforms and growth, focusing on greater capital efficiency, better corporate reporting, and more incentives for individual investment.

In addition, Japan has seen rising profitability, with Japanese corporations catching up with their Western counterparts. Their ROE is rising due to innovation, cost-cutting, and growing export sales. With a benign currency environment and low interest rates, Japan's ROE could rise above 10%, closer to levels achieved in Europe and the US.

Overall, Japan's strong growth trajectory is supported by various factors, including economic reforms, demographics-driven innovation, a stable political environment, and rising profitability. These factors make Japanese mutual funds an attractive long-term investment opportunity.

Rising profitability

Japanese corporations are catching up with their Western counterparts in terms of profitability. Their return on equity (ROE) is rising due to several factors, including innovation, cost-cutting measures, and increasing export sales. This improvement in profitability is expected to continue, given the country's focus on enhancing corporate governance and prioritising ROE.

The ROE of the Tokyo Stock Price Index, a major benchmark for the Japanese market, has more than doubled in the past decade. With a favourable currency environment and low-interest rates, Japan's ROE could surpass 10%, approaching levels seen in Europe and the United States. This makes Japanese companies increasingly attractive investment opportunities.

The country's strong position in the world market, with well-known corporations across various sectors such as automobile manufacturing and electronics, further enhances its investment potential. Japanese companies are well-positioned to benefit from growth in the Asian region, and investing in these established companies provides a strategic advantage for mutual fund managers.

Japan's large and productive economy, ranked as one of the world's best, offers a stable environment for investors. The country has experienced significant positive changes, including improved corporate governance, labour reforms, and cultural shifts that are driving long-term growth potential. Government-led reforms have led companies to focus more on shareholder returns, resulting in higher dividend payouts and improved profit margins.

Additionally, Japan's stable and pro-growth political environment provides a favourable backdrop for investments. The country's reform-minded and pro-business government, along with its pro-inflation central bank, have created a strong impetus for economic growth. These factors, combined with attractive valuations, make Japanese mutual funds a compelling investment opportunity.

Low valuations

Japanese equities are currently trading at lower P/E multiples than historical averages and at a discount to other developed equity markets around the world. This makes Japanese mutual funds a compelling investment opportunity from a valuation standpoint.

The Tokyo Stock Price Index, Japan's major stock index, is dominated by traditional, slow-growing companies, including manufacturers, financials, and telcos. These mature, old-school companies have limited growth potential compared to the nimble, globally competitive companies that make investing in Japan an attractive opportunity.

As a result, Japanese equities are currently undervalued, and active fund managers with on-the-ground research capabilities are better able to uncover the best investment opportunities in Japan. These managers can look "under the hood" to find and focus on high-growth companies that can outperform the benchmark and weather volatile markets.

One example of a "growth in disguise" company is Tokio Marine, Japan's largest general insurance group. It has compelling growth prospects, but its stock is valued at a low price-to-earnings multiple.

Another factor contributing to the low valuations of Japanese equities is the country's stable political environment. Japan has enjoyed a pro-growth political environment, with the current government prioritising economic reforms and incentives for individual investment. This stability makes it likely that the pro-growth policies will remain in place over the coming years, providing a favourable environment for long-term investment.

Improved corporate governance

Japan's improving corporate governance culture is a key catalyst for its economic growth and makes it an attractive prospect for investors. Government-led reforms have caused companies to focus more on shareholder returns. A primary focus of Abenomics' structural reform was corporate governance, which included the initiation of Japan's "Stewardship Code". This has resulted in higher shareholder dividend payouts, increased shareholder activism, higher corporate profit margins, and higher returns on equity for many Japanese companies.

The Japanese Financial Services Agency (FSA) and Tokyo Stock Exchange (TSE) have also enacted significant changes to reinforce the role of sound corporate governance and capital efficiency to improve shareholder value. For example, this year, the TSE asked all listed companies to put policies in place to bolster profitability, long-term returns, and valuations. If companies fail to meet the TSE's updated standards by 2026, they risk delisting. These changes will likely serve as a crucial impetus for Japanese companies to adopt a more shareholder-friendly mindset, helping them unlock greater shareholder value.

The shift towards better corporate governance and a more pro-shareholder mindset is evident in the concrete actions taken by Japanese companies and the government. This bodes well for active managers looking to capture the upside potential in the years ahead.

The improvement in corporate governance has been a significant factor in Japan's economic growth story. The country's strong position in the world market, with well-known corporations across various sectors, makes it an attractive investment target for mutual fund managers. The focus on shareholder returns and stronger internal controls has resulted in higher corporate profit margins and improved financial performance for many Japanese companies.

Additionally, the stable political environment in Japan makes it likely that the current pro-growth policies will remain in place over the coming years, providing a favourable backdrop for investors. The combination of a reform-minded government, a pro-growth agenda, and a pro-business central bank has provided a strong impetus for economic growth.

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