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Japanese election time; time to vote passive?

Japanese election time; time to vote passive?

 The past two general elections in Japan have had the same  result: Shinzo Abe returned as prime minister and a swift, vertiginous rise in Japanese equities.

Following Abe’s first victory in December 2012, the Japanese market had gained 60% by May 2013. And after his second triumph in December 2014, Japanese stocks put on another 20% by the next May.

With Abe recently having called a snap election for 22 October this year, could the pattern hold? The polls indicate that Abe will remain in power, despite a strong challenge from a new opposition alliance headed by Yuriko Koike, governor of Tokyo.

Play it again, Abe

If so, that should in turn spur Japanese shares higher again.

‘For markets, the key implication will be an almost certain change in Japan’s macro policy mix,’ ’ argued Jesper Koll, head of WisdomTree Japan.

‘The probability of taxes going up in 2019 has now risen, which in turn raises the odds that the Bank of Japan will have to do more for longer to insure against the inevitable recession that has always followed consumption-tax hikes,’ he said.

‘What matters is that policy activism is back in Japan, and an early election is poised to prolong the relentless liquidity creation by the Bank of Japan to insure against a tax-hike-induced 2019 recession.’

Go long, go active?

That should be good news for active managers in this sector. In the six months after the 2012 vote, the average manager generated positive risk-adjusted returns despite the broad rally, with a personal information ratio of 0.46 according to Citywire Discovery. In the half-year subsequent to the election in December 2014, the average manager information ratio was again positive at 0.15.

The category’s managers have also delivered positive risk-adjusted performances over both the past three and five years, with average information ratios of 0.1 for each period.

Active managers may also benefit from the lack of an obvious Japanese equity index to track: there are several mainstream options from which buyers must select.

Headlines will, for example, often refer to either the Topix or the Nikkei 225. While the former is a traditional index weighted by market capitalisation, the latter is – similar to the Dow Jones Industrial Average in the US – weighted by price. The Nikkei 225 is thus not particularly representative of Japan’s corporations.

For example, Fast Retailing – which owns Uniqlo – is the largest component of the Nikkei 225 with a weighting of over 6%. It comprises only 0.22% of the market-cap weighted Topix. Conversely, Toyota Motor is the largest stock in the Topix but ranks only 14th in the Nikkei.

Nikkei passive bargains

The Nikkei 225 can however be bought more cheaply than the Topix. Deutsche’s Nikkei 225 is available for a total expense ratio of 0.09%, while iShares has one for 0.48%. Topix ETFs, on the other hand, are only distributed by Lyxor and Amundi and carry total expense ratios of 0.45% and 0.48% respectively.

The MSCI Japan index is more readily available, although it is far narrower with just 320 constituents – equivalent to 85% of the market – than the Topix with over 2,000 members. This long tail of smaller-caps tilts the Topix’s sector exposures too: it has 22.4% in industrials compared with 20.7% for the MSCI Japan, for instance.

Among the MSCI trackers, HSBC’s sterling-denominated ETF charges 0.19%, iShares has a dollar-denominated ETF for 0.2% with hedged versions costing more,

Deutsche’s un-hedged ETF has a 0.3% fee and equivalents hedged into various other currencies for 0.4%, UBS has an un-hedged ETF for 0.35% and hedged ones for 0.45%, and WisdomTree offers a 0.45% sterling-hedged ETF.

That is not the end of the index story, though. Another popular choice is the Nikkei 400, which was established in 2014 to include only companies which hit specific return-on-equity targets, in contrast to the conglomerates some fear have become uncompetitive.

Plenty of providers have rushed into this space, and their ETFs are now generally cheaper than MSCI Japan products. Amundi has a hedged Nikkei 400 fund for 0.18%, PowerShares Source has a hedged one for 0.2%, Deutsche has an un-hedged one for 0.2% or hedged versions for 0.3%, and Lyxor has a 0.25% hedged fund.

Vanguard’s ETF in this space, meanwhile, adheres to the FTSE Japan index. With an ongoing charges figure of 0.19%, its primary distinction is a higher weighting to the consumer sectors at the expense of technology stocks in particular.

A more specific play on yen weakness is the PowerShares Source Stoxx Japan Exporters ETF, available for 0.35%, which focuses on Japanese companies earning at least half their revenues overseas.

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