Rolle im Portfolio
The UBS MSCI Japan ETF provides equity exposure to one of the biggest economies on the globe and could therefore be considered for use as a core component of a well diversified portfolio to gain exposure to the world’s third-largest economy. However, before considering an investment in this ETF--either as core building block or a tactical tool--investors should be aware of existing exposure to Japan through other holdings (for example, Japanese equities comprise nearly 10% of the MSCI World Index) to avoid unintentionally overweighting Japanese shares.
Taking a close look at the track record of the Japanese stock market over the last 20 years, one might wonder whether owning Japanese equities as part of a buy-and-hold strategy would be of any benefit. The MSCI Japan Index lost about 8% of its value over that period, compared to a 255% increase in the MSCI World Index. After the Japanese real estate and stock market meltdown in the 1990s, the Central Bank hesitated to intervene. By the time the Central Bank made a concentrated effort to stimulate the economy, flooding the market with trillions of yen and decreasing interest rates, the economy was already in a deflationary spiral and consumers had lost faith. Low interest rates from there on made the Yen an attractive target for carry traders, helping to strengthen the currency and ultimately hurting exports. However, the stock market rallied since November 2012 while the Yen weakened on the back of a new approach by newly selected Prime Minister Shinzo Abe.
The index is well diversified with little concentration in specific stocks. Its top holding is Toyota representing 7% of its value. The index’s top sector allocation is currently consumer discretionary, representing 22% of the index’s value. Given this high degree of diversification across individual names, the ETF is best used if the investor believes in a broad-based improvement in the Japanese economy as the country moves through a rebuilding period.
Fundamentale Analyse
Japan’s stock market has underperformed those of other developed markets for years. However, this has changed since the election last November of a new government headed by Prime Minister Shinzo Abe. After surging 35.2% YTD to end-August in local currency terms, the MSCI Japan NR Index has returned a healthy 18.4% as measured in Euro, despite a weakening Yen. By way of comparison, the S&P 500 Index has risen by 17.3% and the EURO STOXX 50 Index only by 9.0%; both measured in base currency.
The economy has long suffered under deflationary pressure. However, the announcements by Prime Minister Abe to take aggressive steps to weaken the yen, raising the inflation target and introducing structural reforms, including a long-term growth plan focusing on healthcare and women in the workforce as untapped resources seemed to have turned around the economy. Indeed, the latest data have been encouraging, with GDP growth for the quarter ending June revised upwards to an annualised 3.8% from a preliminary reading of 2.6%; marking the third consecutive quarter of growth. The upward revision was primarily driven by stronger capital investment, up by 5.1% (annualised) against expectations for a 0.4% decline. Particularly interesting for what traditionally has been a heavily export-depending economy, 80% of the second quarter GDP growth came from domestic demand. After lagging other developed markets for years, the Japanese economy is now expanding stronger than the US (2.5%) and the Eurozone (1.1%).
Hosting the Olympic Games in 2020 could further support the economy going forward, as more infrastructure spending will be necessary. However, Nomura estimates that construction spending on stadia and other facilities over the next eight years will account for only 0.3% of GDP.
On the flipside, the encouraging GDP performance could lead to an increase of consumption tax – a very controversial topic as some market participants would prefer the government to focus on deflation. PM Abe has announced plans to increase the tax from currently 5% in two steps to 10% by October 2015 to help bring down the country’s huge debt burden. The final decision – expected in Q4 – will be based not only on GDP figures and other economic data but also on the Bank of Japan’s tankan survey in order to determine whether the recovery is strong enough to withstand the tax rise. The International Monetary Fund and the Bank of Japan argue that the tax increase is necessary in light of the ballooning debt burden – already more than twice the country’s GDP and the largest amongst developed countries.
Generally, market participants remain bullish for the remainder of 2013 and beyond. They expect Japanese stocks to remain undervalued and underexposed to international investors, according to the Wall Street Journal. Therefore, a fundamental reweighting by international investors could lead to billions of Euros flooding the Tokyo stock exchange where foreign investors already account for two-thirds of daily trading.
Indexkonstruktion
The MSCI Japan Index includes approximately 320 of the largest stocks of publicly-traded companies based in Japan. Components must meet minimum criteria for liquidity, foreign ownership restrictions, and a waiting period for newly-listed stocks. The securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller piece of their aggregate market capitalisation floated on public exchanges, the free float adjustment serves to ensure the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed four times a year. As of writing, the index is biased towards consumer discretionary (22% of the index’s value), closely followed by financials (21%) and industrials (20%).
Fondskonstruktion
The UBS MSCI Japan ETF uses physical replication techniques to track the performance of its benchmark, the MSCI Japan index. Given that the index’s components are all very liquid, the fund holds them all in proportion to their weighting in the index, eliminating the potential for tracking error that index sampling might introduce. The fund may lend up to 50% of its assets to generate revenues to also help minimise tracking error. This practice introduces counter-party risk as the party to whom the securities are lent may default, and it is left to investors to decide whether or not the additional income generated through securities lending is adequate compensation for the level of risk entailed. To minimise this risk, UBS restricts securities lending to pre-defined counterparties, holds collateral in a ring-fenced third-party account with State Street Bank, and marks the collateral's value to market daily. UBS and third-party agents such as Clearstream Banking and Euroclear manage the securities lending process, including monitoring collateral values. The ETF distributes dividends twice a year. Movements in the benchmark in excess of returns on cash during the period between when the fund receives dividends and the date it distributes them will result in 'cash drag', which can be a source of tracking error.
Gebühren
The total expense ratio (TER) for this fund is 0.55%. This lies in the upper of the range for ETFs tracking Japanese equities. Other potential costs associated with holding this fund which are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees.
Alternativen
There are two other Japanese large-capitalisation indices popular with ETF providers, the Nikkei 225 and the TOPIX. There is little to choose from between the MSCI Japan and TOPIX indices, but the Nikkei 225 has a far smaller allocation to financial services (about 1%) and utilities (less than 1%) with the difference spread amongst multiple sectors. The iShares Nikkei 225 ETF uses physical replication and levies a TER of 0.50%. The iShares MSCI Japan Monthly EUR Hedged ETF has the greatest trading volume of any ETF tracking that index. The Lyxor Japan TOPIX ETF uses synthetic replication and has the greatest trading volume of any ETF tracking that index and charges a TER of 0.45%.
There are five ETFs tracking the TOPIX, including one from EasyETF, one from ComStage, two from Lyxor (one trading in pounds sterling and one trading in euros) and one Euro hedged version from RBS. While ComStage's ETF charges a low TER of 0.45%, Lyxor's euro-denominated ETF has the greatest daily average on-exchange trading volume, making it a less expensive choice--in terms of the total cost of ownership--for many investors.
