If, like me, you are one of those "value"-style investors who believed that Japan must be due a recovery any year now, you may be despairing of it ever happening. So are millions of Japanese investors.
Every year, the forecasts come out and, every year, the demise of the Japanese bear market is predicted. Usually, an eternally bullish Japanese fund manager is wheeled out from premature retirement to predict that the Nikkei 225 will end the year up at least 10 per cent.
Personally, after all my losses on Japanese shares, tracker funds and structured products, Im close to giving up - which means, of course, that it probably will finally happen this year. And if it does, I reckon investors face a rather difficult choice.
Traditionally, investors have been advised to treat Japan with some (understandable) caution when it comes to using index tracker funds. Like our own FTSE 100 index, the Nikkei 225 is full of lots of contrasting push and pull forces - banks may be on the point of recovering, having largely avoided the whole US sub-prime debacle, but exporters are getting hit hard by a downturn in their biggest market.
So these opposing forces have led some investors to prefer active fund managers, who really know Japan and can make big sector bets. Id recommend people such as George Gosden at Insight or Stuart Parks at Invesco Perpetual who have a great track record of consistent outperformance in an under-performing market.
But whichever type of management is chosen, you still need to factor unpredictability into your plans. Take the last couple of weeks. The US equity market wobbled a few per cent or so. Europe got well and truly thumped, thanks to SocGens rogue trader. Japan, however, endured an absolute bloodbath in spite of being in arguably better financial shape.
This huge unpredictability makes me think of tracking the Japanese market using something like Lyxors Topix exchange traded fund (ETF). This is listed on the London Stock Exchange (code: LTPX) and tracks the slightly less well known but broader Tokyo Stock Exchange Topix index.
I think this approach is preferable to that of the iShares and Deutsche ETFs which track the slightly less relevant MSCI Japan index. The Lyxor ETF also only charges 0.5 per cent for that tracking, which is a fair price for what is essentially a dumb way of buying into Japan - all the active fund managers charge at least 1.5 per cent a year. So, with the ETF, you start 1 per cent ahead of the actively managed funds.
For more adventurous investors, though, there are now a number of alternatives.
If you believe that when the sun rises over Japan the returns could be dazzling, take a look at the accelerated structured products out there.
SocGen, for example, has an Accelerated Nikkei 225 Tracker product (SG08, see http://uk.warrants.com), due to redeem in March 2009, which offers 250 per cent upside participation up to a maximum gain of 75 per cent. But, be careful: theres no capital protection on this product.
Barclays Stockbrokers also has a fairly attractive investment note called Nikkei 225 Supertracker which redeems November 2012. This offers 200 per cent upside participation plus 100 per cent of your capital back at maturity, as long as the index has not fallen to less than 60 per cent of its initial level, and failed to recover from that level.
These participation rates can sound attractive but my cynical side makes me question these investments. What happens if 2008 isnt the year? What happens if Japan stays in a funk? The simple answer may be to wait and buy on strength - or just ignore Japan altogether.
But there is one more alternative that Ive been quietly snapping up for my pension plan: a rather obscure listed structured investment from Merrill Lynch called Japan High Income. Its one of the share classes of the ELDeRS closed-ended company, listed on the Channel Islands Stock Exchange (code: EML, see www.cisx.com).
These shares offer a fairly boring 100 per cent participation in any rise in the Topix index through to December 2011 with one big and important plus - you also get 4p per �1 share in income. This addresses the classic problem with structured products: you buy participation in an index but you lose the income stream youd have got from holding the underlying shares.
So with this ELDeRS share class, you actually get more than the Topix index yields. And it gets better. The shares currently trade at around 80p, compared with the �1 "floor" price, so the yield is actually 5 per cent - and you stand to make an additional 20p per share in capital terms in four years time as long as the Topix index stays above 950 (it is currently at 1328).
If the Topix does fall below that barrier, you lose the guaranteed capital protection of 100p and incur losses on a one for one basis, although you still get the income.
This seems to me like a reasonable two-way bet. If the Topix stays in the doldrums, you get the income and the likelihood of a nice little capital gain at redemption. In fact, I reckon it works out at 10 per cent a year including the income. Or, if the market zooms ahead, you still get that income plus the full upside participation.
The big risk is that Japanese markets keep on falling as they have been in recent weeks. Still, with this small, imperfectly marketed fund, you do get a chance to see the sun come up - and get paid while you wait.
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