This year marks the 25th anniversary of the repeal of the ban on over-the-counter sales of 'toshi shintaku' or 'toshin' (Japanese mutual funds) at financial institutions other than securities firms in 1998. Below, we rank the top performing toshin funds for long-term returns over 20 years.
Translated from an article originally published in Ma-Do magazine vol. 70, May 2023.
In the 25 years since Japan allowed financial institutions other than brokerages to sell toshi shintaku, the proliferation of new sales channels such as banks, has caused investment in toshin to increase dramatically. Investment slowed following the collapse of Lehman Brothers in 2008 and plateaued thereafter. In recent years, however, investment in has increased, partly due to the launch of Tsumitate NISA*, and overall AUM in toshin funds has accelerated, particularly in foreign equity index funds. Needless to say, further growth in AUM is expected with the launch of the new NISA in 2024, when the system becomes permanent and the quota is expanded.
* Nippon Individual Savings Account (NISA) is a tax-free investment available to individual investors in Japan. Tsumitame means cumulative or installment. Tsumitate NISA is the cumulative/installment-type NISA.
We have examined toshin fund performance over a 20-year span in the 25 years that OTC sales at banks and other financial institutions have been allowed. Because only a few funds have existed for 20 years or more, and the new NISA's Growth Quota framework sets a minimum trust period of 20 years as a condition for products offered, we have ranked the top funds based on their 20-year returns at the end of April 2023.
TOP 30 TOSHIN FUNDS FOR 20-YEAR CUMULATIVE RETURNS (as of Apr. 30, 2023)
Source: Mitsubishi Asset Brains
The large number of domestic equity funds on the list may surprise some, however, there are 185 domestic equity funds with a track record of more than 20 years, compared with only 53 foreign equity (developed country) funds.
According to Fund Analyst Yohei Shimegi at Mitsubishi Asset Brains, "It would be more accurate to say the performance of the top-ranked funds was outstanding, rather than the performance of domestic equity funds in general. In fact, the average and median annualized returns were higher for foreign equity (developed country) funds.” The average annualized return for domestic equity toshin is 7.19%, with a median of 6.83%. The average annualized return for foreign equity (developed countries) toshin was 7.43%, with a median of 7.58%, both of which are higher than their domestic counterparts.
The extraordinary average annualized returns achieved by top-ranked ‘JPM The Japan Fund’ and second place ‘Super Small Cap Portfolio’, at 13.44% and 13.18% respectively, illustrates the importance of choosing carefully in the domestic equity category.
It is also true that the top funds are not necessarily popular with individual/retail investors. ‘JPM The Japan Fund’ became suddenly popular in early 2013, when its AUM reached nearly JPY 300 billion. It now stands at around JPY 66 billion. The AUM of ‘Super Small Cap Portfolio’ is just under JPY 700 million. Many of the top funds are small- and mid-cap stocks types and may prove more difficult to manage as AUM grows. Still, they deserve greater recognition.
Among the top 30 toshin, 6th place 'Fidelity Asia Equity Fund' and the three other emerging equity funds on the list are all Asia-focused. Seventh ranked foreign equity toshin (developed country) 'netWIN GS Technology Equity Fund B Course (no currency hedging)' continues to be popular, no doubt owing to its positive long-term performance.
Almost all the top 30 are active funds. Although the toshin market seems dominated by index funds of late, higher returns can undoubtedly be achieved if solid, active funds are selected. The average annualized return for TOPIX over 20 years is around 7% but returns for all the domestic equity funds in this ranking are significantly higher, at more than 9%. Again, however, fund identification is important. The minimum annualized average return among the 185 domestic equity funds covered in this research was 3.35%.
Many predict next year’s launch of the new NISA will help long-term investment in Japan become more firmly established. Though some believe index funds will remain popular among retail investors, as they are currently in Tsumitate NISA, there is a gradual movement to reassess active funds. The rankings in this research clearly show that active funds are profitable, if they are well identified. We hope that in the future the further movement towards funds that have achieved high performance over the long term being more justifiably evaluated.
< Toshiaki Kikuchi >