Warren Buffett’s recent visit to Tokyo led to speculation about his interest in expanding its Japanese portfolio. With consumer prices on the rise, many portfolio managers are considering a bet on an end to the country’s two-decade fight against deflation. Meanwhile, the country’s long-unloved stock market could translate to plenty of alpha potential.

In addition to inflation, the Tokyo Stock Exchange announced that companies with a price-to-book ratio that falls consistently below one would be required to develop specific plans to improve the situation and demonstrate awareness of their cost of capital. These efforts could shame companies into unlocking value.

Activist investors like Elliott Management and ValueAct are already pushing companies to make shareholder-friendly changes. For instance, Elliott took a stake in Dai Nippon Printing, which resulted in a 40% increase in share price in January alone. And Honda’s shares increased after the company announced a $500 million buyback in February.

In this edition, we look at trending Japan Funds investors may want to consider to bet on the country’s equity market.

1. Fidelity Japan Smaller Companies Fund (FJSCX)

The Fidelity Japan Small Companies Fund (FJSCX) comes in first place with a 9.20% trailing 12-month return. And with a 0.91% expense ratio, it’s one of the cheapest funds on our list.

The fund invests at least 80% of its assets in Japanese equities and other investments with economic ties to Japan. But rather than investing in the largest issuers, the fund seeks out smaller companies similar to the Russell 2000 index in the United States. As a result, the fund may offer broader economic exposure than many of its peers.

Currently, the fund’s portfolio holds more than 80 companies concentrated in industrials (22.92%), information technology (20.69%), and consumer discretionary (19.06%). The largest holdings include Renesas Electronics Corp., Inpex Corp., and Amano Corp., rather than the larger iconic companies many investors associate with Japan.

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Source: BarChart.com.

2. Fidelity Japan Fund (FJPNX)

The Fidelity Japan Fund (FJPNX) comes in second place with a 6.49% trailing 12-month return. With a 1.13% expense ratio, the fund is more expensive than the previous option on our list.

The fund invests at least 80% of its assets in the securities of Japanese equities and other investments with economic ties to the country. Unlike the previous fund on our list, this fund focuses on the largest companies by market capitalization. So, you’re getting more exposure to larger companies and broader exposure across sectors.

Currently, the portfolio consists of about 85 equities concentrated in information technology (18.38%), industrials (16.99%), and consumer discretionary (16.62%). The largest holdings include well-known names like Sony Group Corp. and Sumitomo Mitsui Financial Group Inc.

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Source: BarChart.com.

3. Hennessy Japan Investor Fund (HJPNX)

The Hennessy Japan Investor Fund (HJPNX) rounds out this week’s list with a 6.27% trailing 12-month return. While it comes in third place this week, the fund has one of the most substantial long-term track records, with an average annualized total return of 7.16% since inception in 2003. However, it charges the highest expense ratio at 1.44%.

The actively managed fund maintains a highly-concentrated, best-ideas portfolio of Japanese companies. In particular, fund managers seek out well-capitalized companies with little debt, a durable competitive advantage, high return on equity, above-average earnings growth, strong cash flow generation, and an intrinsic valuation gap.

Currently, the fund holds a concentrated portfolio of just 29 equities weighted toward industrials (26.30%), financials (17.80%), and consumer staples (14.90%). The largest holdings include Hitachi Ltd., Mitsubishi Corp., Rohto Pharmaceutical Co., Ltd., and Sony Group Corp.

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Source: BarChart.com.

Japanese equities could experience the best returns in generations if the country can pull itself out of its deflationary cycle. With activist investors already involved and Warren Buffett taking a recent visit, investors may want to reconsider adding Japanese exposure to their portfolios, particularly for international diversification.

Want to generate high income without undertaking too much risk? Check out our complete Best High Dividend Model Portfolio.

All data as of April 28, 2023.

Methodology

MutualFunds.com analyzes the search patterns of our visitors every two weeks to find the top trending funds. By sharing these trends with our readers, we hope to provide insights into what the financial world is concerned about and how to position your portfolio. First, we select the top trending theme from more than 200 themes listed on MutualFunds.com based on the percentage increase in monthly viewership. Then, we choose the top three funds with the highest one-year trailing total returns from the top trending theme. To ensure funds’ quality and staying power, we only look at those mutual funds with a minimum of $100 million in assets and a track record of at least three years. We also remove those mutual funds closed to new investors and unavailable for investment outside registered accounts such as retirement or 529.

Fund performances are reported based on trailing 12-month total returns.