Global economic slowdown, U.S. federal rate hikes and the ongoing U.S.-China trade dispute were responsible for the Japanese mutual fund industry’s 1.03% drop in assets in 2018, an Asia Asset Management report cited earlier this week. Given the headwinds affecting Japanese mutual funds’ performance, it would be best to get rid of a few funds that are expected to underperform.
U.S.-China Trade War Dragged Japanese Equities Down
The ongoing trade war between the world’s two largest economies that commenced in July 2018 had a negative effect on global stock markets. Japan’s Nikkei incurred losses of 17.02% against the S&P 500’s decrease of 13.97% during fourth-quarter last year, reflecting the big hit that the Japan’s stock market took.
While talks are being held again between the United States and China this week to resolve the trade war by the Mar 1 deadline, the changes necessary in China’s policies will take time to be implemented. United States’ demand to resolve issues such as intellectual property rights, forced technology transfers and Chinese market access by American companies requires reevaluation and structuring of Chinese policies to accommodate a favorable deal for the United States.
According to The Investment Trust Association, Japan (JITA), the Asian country’s mutual fund industry had 194.72 trillion yen (US$1.77 trillion) in assets under management (AUM) at the end of 2018, which had declined from 196.75 trillion yen in the beginning of the year.
The sharp decline in Japan’s mutual funds’ AUM is a result of the country’s stock market losses, Asia Asset Management cited a Kuala Lumpur-based fund manager.
Global Economic Growth Slowdown Affects Japan
The International Monetary Fund updated its World Economic Outlook for 2019 recently, citing weakening of global expansion. The fund now projects global growth of 3.5% for January and 3.6% for 2020, down from its October projections by 0.2 and 0.1 percentage points, respectively.
Slowdown in global economic growth remains a key issue this year because of slowing growth in the China’s economy, Euro zone and the creeping deceleration in America’s economy. The European Union cut its growth outlook for euro zone to 1.3% from 1.9% this year as it anticipates the largest European economies to be held back by global trade tensions amid other concerns, a CNBC report cited. In the United Kingdom, Bank of England slashed its growth and inflation forecasts as well, putting up the weakest outlook for the region in a decade.
Japan’s economy is poised to take a hit as some sectors of the country are exposed to risks from these global trends. According to Hide Yoneyama, an economist at Fujitsu Research Institute, a possible global slowdown combined with other risk factors such as the trade war and United Kingdom’s possible exit from the European Union without a trade deal could have an adverse affect on the Japanese economy.
Therefore, given the factors that could potentially pull down the Japanese stock markets further, it would be advisable to stay away from a few Japanese mutual funds that carry an unfavorable Zacks Rank.
2 JapanMutual Funds to Sell
We have selected two funds you should consider removing from your portfolio. These funds carry a Zacks Mutual Fund Rank #4 (Sell) or 5 (Strong Sell).
We expect these funds to underperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
ProFunds UltraJapan Inv (UJPIX - Free Report) seeks daily investment results that correspond to twice the daily performance of Nikkei 225 Stock Exchange. The non-diversified fund invests in financial instruments that ProFund Advisors feel will produce daily returns consistent with the fund’s objective for investment.
UJPIXhas a Zacks Mutual Fund Rank #4 and an annual expense ratio of 1.66%, which is below the category average of 1.99%. The fund has year-to-date, one-year and three-year returns of -25.59%, -25.59% and -0.14%, respectively.
Matthews Japan Investor (MJFOX - Free Report) aims to gain capital by investing the majority of its net assets in the preferred and common stocks of companies located in Japan.
MJFOX has a Zacks Mutual Fund Rank #5 and an annual expense ratio of 0.94%, which is below the category average of 1.27%. The fund has year-to-date and one-year returns of -20.17% and -20.18%, respectively.
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