SINGAPORE (June 28): Britain’s decision to exit the European Union saw Japan’s benchmark Nikkei index slumping 7.9% to February levels last Friday. Since then, the index has recovered some ground, gaining 2.5%. Should investors decide to jump into Japanese stocks now, which funds are best positioned in the medium to long term?

This year, the best Japan-focused funds sold in Singapore are those invested in small/mid-cap stocks (see table). They are led by the $986 million Parvest Equity Japan Small Cap fund, up 4.5%; the $158 million Fidelity Japan Aggressive fund, up 3.6%; and the $174 million PineBridge Japan Small Cap Equity fund, up 3.5%. This compares to the bottom five performers, which are all large-cap funds and have returns ranging from –12% to –15.7%.

Notes: Data sourced from Morningstar Direct. Returns as at June 27 and in Singapore dollar terms. Only funds that have price data as at June 27 are included

Small/mid cap funds have outperformed largely due to the domestic focus of smaller Japanese companies. This insulates them from global macros and the strong yen. “When we look at earnings, despite Japan’s macroeconomic numbers, domestic businesses are holding up well, while the overall negative revisions are mostly affecting global cyclical stocks, especially the automotive sector, of which large-caps have a greater exposure to currency movements,” says Midori Katsumi, Head of Japanese Small Cap Equities at PineBridge Investments, in an e-mail reply to The Edge Singapore in May.

The yen’s 17.9% appreciation against the US dollar this year has hurt the earnings of Japan’s export-dependent large-cap companies such as Honda and Toyota. But if there is near-term weakening of the yen due to central bank intervention or additional stimulus, large-cap funds could be an opportunistic trade.

Meanwhile, a large-cap fund that has bucked the trend and performed well is the $3.6 billion JPMorgan Japan Equity fund. To find out more about Japanese equity funds and how JPMorgan Japan Equity has beaten its peers, refer to The Edge Singapore (week of May 9 – May 16).