I provided some data information to my friend about Japan because of something I mentioned on my Telegram group. Then I decided to note this down in an article.
I think everyone have the impression that if you invest in equities, you faced decades of poor performances.
The chart below shows the performance of the MSCI Japan Index (total return, which means that dividends are considered but gross of taxes) from 1970 to 2025:
The chart shows how much $1 million in 1970 will grow to 56 years later. It will grow to $110 million today. It is not often the destination but how we get there. In 15 years, your $1 million would have grown to $12 mil. Then in 5 short years, that $12 mil will grow to nearly $60 mil. Before being cut in half. You will finally get back to $60 mil 25 years later.
You can think about the disparity in performance:
- The person in the past 10x their Japan equity in 15 years.
- The next person about 4x their Japan equity in 5 years.
- The third person barely break even in 25 years.
There is no certainty there.
Had you taken profit during those 15 years you won’t get that 10x or 4x during those time. If you have not taken profit you would have suffered so much in that 25 years.
Investing based on near term hindsight would cause a great mismatched between reality and expectations.
Systematic Active Japan Equity Performances – 10 Years Rolling Return
I wanted to provide the person various equity indexes that I have access to. The reason is for them to figure out with their own hands and eyes if there is a side story to tell about Japan equity performance.
I provided six other index return performances:
- Dimensional Japan Small Cap – A systematic active index that shows the returns if we go back to 1981 and tilt the smaller companies in Japan to cheaper and more profitable companies.
- Dimensional Japan Small Cap Value – Almost the same as #1 but selecting the cheapest 35% only of those that ranks top in profitability and cheap.
- Fama/French Japan Market Index – Kenneth French’s research index which covers the Japan market.
- Fama/French Japan Growth Index – The most expensive 30% stocks of the market by book value.
- Fama/French Japan Value Index – the cheapest 30% stocks of the market by book value.
- Japanese Large Companies – Covers the large-cap segment of the Japanese market.
I am not going to mentioned much about whether this systematic-active is better than the other but to let the reader just see the disparity in performance.
The chart below shows the 10-year annualized rolling return of the indexes over 44 years:
Each point on this chart is a 10-year performance.
This allows you to imagine if you have $1 million, and you invest in any point, how the performance will be. The first thing you will note is that the systematic index that is consistently below is Fama/French Japan Growth. Consistently the poorest performing.
Secondly, even after 10 years, equities can be negative. The MSCI Japan, Large Japanese companies, Growth, and Market Index are more susceptive. 10 years is probably…. not long term enough.
There are also 10-year periods where you could earn 20% p.a.
Last thing is… if you take a look at 1999, choosing different systematic-active or index tracking strategies can result in a range of performance from either -10% p.a. for 10 years to 9.7% p.a. for 10 years.
More so in recent years, that performance differences have been much much tighter.
If we factor in the latest 10-year performance the poorest is still Fama/French Growth at 4.7% p.a. and the best is Dimensional Japan Small Cap Value at 7.6% p.a.
Systematic Active Japan Equity Performances – 15 Years Rolling Return
Instead of 10-years, now we roll 15-years:
15 years is long enough, and that is the number of years that it took the S&P 500 to break even. Even so, some Japanese equity could not. You can see that if you invested in those 1987 and 1993 periods, you might not have broken even.
If we have a “tenure” or “maturity” period for equities to break even, it is likely not 15 years but more than that.
What you would observe is that at 15 years both the Fama/French Japan Value index and the Dimensional Japan Small Cap Value index are positive, at any point.
Both have different methodologies of defining value but regardless, the value approach did pretty well in Japan.
This is sort of the similar observation at the US: If we look through the history of US markets, US small cap value is the only group that is positive over 10 years if we don’t include the 1926-1931 data. Can’t say the same for large-cap.
Systematic Active Japan Equity Performances – 20 Years Rolling Return
The performance lines separate more if we consider 20-year rolling returns:
Quite nice that if you decide to go with value at any point in the past 44 years with all your money, the lowest compounded return is 5% p.a. despite that deflationary period.
We can also see that the small caps (with less tilts to value and profitability) also did better than large cap and growth.
Focus on small caps may not mean worse outcome in a period of overvaluation.
Focus on value achieves a different unique return that need not be more risky. It may allow you to achieve your goals still.
We don’t know the future, but sometimes looking at a region that did pretty poorly in the eyes of the general public may open our eyes and answer some questions that we won’t be able to get from better performing markets.
I met up with another friend on Sunday, and he mentions: “Unlike last time, instead of holding Singapore stocks with a value lens, I prefer to add growth companies or ETFs to the mix.”
I wonder if he has seen the evidence of growth outperformance and whether his lens will change if he sees a market like this with consistent underperformance of growth companies.
In a way, I hope this article will also show you that giving you an average return, or a planning return figure the most accurately is also no use.
Your return is a single draw from a basket of future possible returns.
If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.
You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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