Funds: Pick up some bargains in Japan
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Senior Writer
Jody Clarke Oct 23, 2009
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According to the Investment Management Association, £100 put into the average investment trust ten years ago would be worth £175 today – compared to £123 for the average unit trust. Why the big gap?
First, as publicly listed companies – which invest in the shares of other listed companies – investment trusts are unable to pay commission to financial advisers. So overall fees are lower.
On the flipside, being listed means a trust's share prices can suffer big short-term fluctuations. But this can be great if you're a buyer when its share price falls below the value of its net assets; for example, if a trust trades at a discount to its net asset value (NAV) of 10%, £1 of shares costs 90p.
However, performance and costs aside, there are risks. One is regulation. The European Union's draft Directive on Alternative Investment Fund Managers (AIFM) could tighten the rules on everything from the smallest investment trusts to the largest hedge funds. It could limit gearing – investment trusts often borrow money to boost returns – and also make it even harder for trusts to market themselves.
Intensive lobbying from Britain, which has a big investment trust sector, is ongoing, so the AIFM isn't likely to become law overnight. And even when it is in force it is unlikely to detract from the main selling point of investment trusts – large discounts. Anyone wanting to benefit from these should look to Japan.
With wages falling, Japanese consumers are in no position to spend their way into a recovery. Nonetheless, Japan is enjoying one of the strongest rebounds of any developed economy, so now's a good time to take another look. GDP grew 0.6% between April and June compared to the previous quarter – that suggests an annualised 2.3% gain.
Meanwhile, the average price/book-value ratio of the Topix Small Cap Index stands at just 0.84. That means that you can buy an average Japanese small-cap stock for less than the value of its net assets.
The iShares MSCI Japan Small Cap ETF is already up 33% over one year, but investors can still snap up a discounted trust such as JP Morgan Japanese (LSE: JFJ). It trades on a 17% discount to net asset value.
Investors looking to benefit from small-cap valuations should consider Baillie Gifford Japan (LSE: BGFD), a small and mid- cap trust. It trades on a 12.5% discount to net assets.
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