– Important Note: This context of potential flows is only from a subset of the broad market universe of funds where country allocation data is available. We identified $811 billion of fund assets where Japan country exposure is reported, but the total size of the foreign large blend category is approximately $1.1 trillion. If other funds that do not report Japan exposures show similar patterns of being under-weight Japanese equities, the amount of flows to Japan from just U.S. diversified mutual funds could thus be closer to $42 billion.
Since the inception of “Abenomics,” TOPIX returned 77.64% cumulatively.1 Interestingly, the yen decreased significantly over this period, which neutralized some of the equity price rise and lowered the relative exposure in market cap benchmarks. In the ETF space, flows have gone toward currency-hedged ETFs over the last two years, which help neutralize this effect.
Global investors may slowly be convinced to stow away their two-decade-long perception of poor Japanese equity market performance. Japanese Prime Minister Shinzo Abe’s team is showing a strong commitment to breaking the deflation cycle. After two lost decades of poor performance for Japanese equities, money managers may have to re-evaluate their habitual under-weighted Japan position on the back of a weakening yen, improving earnings outlook and still very reasonable market valuation multiples.
Unless otherwise stated, data source is Morningstar, as of 10/31/14.
1Total returns between 11/30/12 and 10/31/14.
Important Risks Related to this Article
Investments focused in Japan are increasing the impact of events and developments associated with the region, which can adversely affect performance.