3 handpicked funds to invest in Japan

Many of the world’s stock markets have hit new all-time highs this year with Japan being one of the latest. There are lots of reasons for this including better news on the tariffs and the weak yen, both of which help the vital export sector, but the country is also benefitting from some important domestic considerations.

After decades of deflation, which had rewarded individuals and companies for hoarding cash, the economy is finally experiencing a modest bout of inflation that could result in significant new money coming into the stock market and pushing up prices. The move could be further supported by the ongoing program of corporate reform that is encouraging companies to return more capital to shareholders in the form of dividends and share buybacks.

Investors who want to take advantage by increasing their allocation to the country could start by looking at the three handpicked Japanese funds in the Select 50. These each offer a different type of exposure that could add an extra element of diversification to a balanced portfolio.

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Baillie Gifford Japanese Fund

The first of the three is the Baillie Gifford Japanese Fund, which like the firm’s other vehicles has an aggressive growth style that targets mould-breaking companies that will disrupt an industry and eventually become long-term winners. This is a difficult approach to get right, but there are a couple of experienced managers at the helm with a strong team behind them.

In a recent update they said that the Japanese equity market offers a broad selection of high-quality companies capable of delivering attractive and sustainable earnings growth for shareholders. “In contrast to other major markets, growth often commands little or no valuation premium in Japan, and we continue to identify global leading businesses which trade on a substantial discount to their peers.”¹

They have put together a concentrated portfolio of 62 stocks with the ten largest positions accounting for 45.3% of the assets. The active share relative to the Topix index is an incredibly high 82%, which shows that the holdings deviate significantly from the benchmark.²

Baillie Gifford’s growth style has been out of favour and over the last five years the annualised return of 3.9% per annum was well behind the 9.1% achieved by the benchmark.³ However, the managers believe that the stylistic headwinds that have hindered the performance—particularly the cyclical upswing driven by the global trade recovery and a weak currency—are now easing, setting the stage for stronger outperformance ahead.⁴

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Schroder Japan Trust

A good complementary holding is the Schroder Japan Trust, which invests in undervalued companies with the aim of delivering a better return than the market as a whole on a rolling three-to-five year view.⁵ The team behind it is largely made up of Japanese nationals based in the country, with the fund benefitting from excellent on the ground research.

Manager Masaki Taketsume has built a portfolio of 60 to 70 of his highest conviction ideas where the share price doesn’t reflect the underlying fundamentals as a result of: a market misperception; a market oversight, which is more common among the small and mid-caps; or a short-term overreaction to a transitory event. There are also some best-in-class stocks with reasonable valuations.⁶

The investment trust recently adopted an enhanced dividend policy to pay out 4% of the average net asset value in each financial year³, with the shares currently yielding 3.63%. Please note this is not guaranteed. Despite the active share buyback programme, the discount remains close to the historic average at 9%.

Over the five years to the end of July the Schroder Japan Trust generated an annualised share price return of 13.8% per annum, which was well ahead of the 9.1% produced by the benchmark⁷. This was partly due to the gearing (borrowing to invest) of around 13% that has the effect of increasing the potential gains and losses.

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iShares Core MSCI Japan ETF

A passively managed alternative is the iShares Core MSCI Japan ETF, which offers a diversified portfolio of Japanese companies for an ongoing charge of just 0.12%. It has almost 1,000 different holdings including large, mid and small cap stocks⁸ so it would be sufficient in itself to provide a broad exposure to the country.

iShares has been a global leader in the exchange traded funds marketplace for more than twenty years and is now owned by BlackRock, one of the world’s biggest providers of index trackers. The Core MSCI Japan offering is large and liquid, with $6.5bn of assets under management, which is an important consideration when choosing an ETF.⁹

It works by investing in the underlying securities, although it uses an optimised approach to reduce the cost and doesn’t necessarily hold every stock in the benchmark. Over the five years to the end of July the ETF generated an annualised return of 8.5% per annum, which is very close to the 8.6% produced by the index.¹⁰

• More on iShares Core MSCI Japan ETF

If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.

• See more Select 50 funds selected by experts
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Past performance is not a reliable indicator of future returns

Source: FE, total returns from 4.9.20 to 4.9.25. Excludes initial charge.

Source:

^1,2,3 Baillie Gifford, July 2025 factsheet 
⁴ Baillie Gifford, annual accounts for the year ended 30 April 2025
^5,6 Schroder Japan Trust, interim accounts for the 6 months to 31 January 2025
⁷ Schroder Japan Trust, July factsheet
^8,9,10 iShares factsheet

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Shares in the Schroder Japan investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.