Small/large cap allocation in Japan

aroominyork

How do people split their small/large cap allocation in Japan, because it certainly doesn’t mirror the UK/Europe model which I see as moderately better returns for slightly/moderately higher risk over the medium term.

My two Japan-specific funds are Lindsell Train Japanese (large cap) and Shin Nippon (small cap). Charting these on Trustnet, over the last ten years LT has risen 200% while Shin Nippon has risen 800% (or 1000% if you go back to last autumn). Yet if you go back to the three years 2006-2008 LT held its ground while Shin Nippon fell nearly 70%. While much of this can be put down to stagnation and Abenomics, clearly Japan is not a straightforward investment environment.

I am taking a ten year pre-retirement view and have 9.5% of my equities in Japan. The bull (hopefully not the bullxxxx) in me says the Japanese economy and business environment is now reasonably stable and the potential upsides of being radically overweight in Shin Nippon outweigh the risks. What are other people’s approaches?

fun4everyone

I have a similar strategy for Japan as you and roughly the same allocation. I also use the Lindsell Train Japanese equity fund but I use Baille Gifford Japanese smaller companies as my other. Both have been very rewarding over time. Lindsell Train is listed as mid caps on morningstar btw (and I prefer it that way as I cba with a managed or passive fund on Japanese large caps), although so is BG.

I have a longer time frame than you and as such am willing to overweight mid/small caps. I think I still would at 10 years out but that is personal risk preference. I am not going to try and guess which geographical area will outperform though and go massively overweight Japan, there is plenty of growth to be had in small/micro caps everywhere else as well.

aroominyork

fun4everyone wrote: »

I have a similar strategy for Japan as you and roughly the same allocation. I also use the Lindsell Train Japanese equity fund but I use Baille Gifford Japanese smaller companies as my other. Both have been very rewarding over time. Lindsell Train is listed as mid caps on morningstar btw (and I prefer it that way as I cba with a managed or passive fund on Japanese large caps), although so is BG.

I have a longer time frame than you and as such am willing to overweight mid/small caps. I think I still would at 10 years out but that is personal risk preference. I am not going to try and guess which geographical area will outperform though and go massively overweight Japan, there is plenty of growth to be had in small/micro caps everywhere else as well.

Morningstar is fair: 38% of LT holdings are <£3bn market cap. To clarify, I am not planning to further overweight Japan - it is the small cap issue that interests me.

fun4everyone

aroominyork wrote: »

To clarify, I am not planning to further overweight Japan - it is the small cap issue that interests me.

There is strong evidence small caps outperform over time compared to large caps. For that reason I made the decision to heavily overweight them in general in my portfolio. Nothing is guaranteed though and there is of course more risk/volatility in doing this. Only you can make the decision as to if this is suitable for you or not, although it sounds like you are going to be invested for many more decades so in your shoes I would be personally. In general I like to use active funds to access mid/small/micro caps.

aroominyork

fun4everyone wrote: »

There is strong evidence small caps outperform over time compared to large caps. For that reason I made the decision to heavily overweight them in general in my portfolio. Nothing is guaranteed though and there is of course more risk/volatility in doing this. Only you can make the decision as to if this is suitable for you or not, although it sounds like you are going to be invested for many more decades so in your shoes I would be personally. In general I like to use active funds to access mid/small/micro caps.

The out-performance in Japan has been greater than in UK/Europe; maybe a better comparison than LT vs. Shin Nippon is Baillie Gifford Japanese vs. Baillie Gifford Japanese Smaller Companies. Over 10 years the increases are 244% and 480% respectively. It's the macro environment of Japan and how that affects the likely risk/return that I would like to understand better, to assess whether it is a fair call to see smaller companies' risk/return for Japan as positive compared to other regions.

fun4everyone

aroominyork wrote: »

The out-performance in Japan has been greater than in UK/Europe; maybe a better comparison than LT vs. Shin Nippon is Baillie Gifford Japanese vs. Baillie Gifford Japanese Smaller Companies. Over 10 years the increases are 244% and 480% respectively. It's the macro environment of Japan and how that affects the likely risk/return that I would like to understand better, to assess whether it is a fair call to see smaller companies' risk/return for Japan as positive compared to other regions.

Ok, I understand your point now I think. Yes fair enough. Perhaps it is relevant to your question that the small cap premium is at its lowest in the USA where there is only slight out performance compared to the S&P 500.
Japanese large caps are excruciating I agree and I want to completely avoid them. There is quite a divergence in the UK as well.

Prism

I have Legg Mason IF which blends the large cap (18%) and mid/small cap. Performance has been great I have had it for about 3 years (up nearly 100%) but it is a very wild ride!

aroominyork

Prism wrote: »

I have Legg Mason IF which blends the large cap (18%) and mid/small cap. Performance has been great I have had it for about 3 years (up nearly 100%) but it is a very wild ride!

The words "Legg, Mason, Japan" in the same sentence make my stomach queasy but in reality it is not a hugely different ride from Shin Nippon. So it reinforces my question about whether, for a 10 year view and a country that represents under 10% of a portfolio, a small cap focus is a reasonable or a reckless risk.

Prism

aroominyork wrote: »

The words "Legg, Mason, Japan" in the same sentence make my stomach queasy but in reality it is not a hugely different ride from Shin Nippon. So it reinforces my question about whether, for a 10 year view and a country that represents under 10% of a portfolio, a small cap focus is a reasonable or a reckless risk.

Its about 7% of my total equities and I am aiming for about 10 years until I might consider retirement. At that point it is too volatile I would say to use in drawdown

aroominyork

Prism wrote: »

Its about 7% of my total equities and I am aiming for about 10 years until I might consider retirement. At that point it is too volatile I would say to use in drawdown

I am thinking similarly: reduce my exposure to Japan by a couple of % but increase the risk until I get towards drawdown.

I thought I'd see if any other threads have discussed this so I did a search and found we had the same discussion a while back! https://forums.moneysavingexpert.com/discussion/5823423/investing-in-japan-what-mix-of-market-caps

aroominyork

I’ve number-crunched this a little, comparing:
- BG Shin Nippon NAV
- BG Japanese Smaller Companies
- BG Japanese
- Lindsell Train Japanese, where the non-Shin Nippon part of my Japan allocation now sits.

Over the last ten years the four funds have risen 602%, 427%, 231% and 205% respectively. Over five years the figures are 173%, 147%, 92%, 133%. The third set are for the last three years to reflect when Praveen Kumar started managing Shin Nippon and BG Japanese Smaller Companies: 99%, 92%, 76%, 75%.

Obviously the two small cap options have outperformed the two multi-cap funds and it’s an individual decision about how much more gas is in that tank and the risk associated with it. If going full tilt on small caps and not looking beyond Baillie Gifford, the choice is between Shin Nippon and the OEIC. Going back ten years Shin Nippon was trading at a 20% discount, while for the last six years it has traded pretty consistently at a single digit premium. Recent volatility hasn’t been that different – Shin Nippon FE 207 vs. OEIC FE 195 – but since a punt on Japanese smaller companies could go horribly wrong, it seems like the OEIC provides some sensible downside protection against Shin Nippon returning to discount territory. Any thoughts out there about this?