Last year I recommended an investment in cheap Japanese stocks, but with a currency hedge to protect against falls in yen versus the US dollar. Almost thirteen months later, that recommendation has made 30%, measured in US dollars. Japanese stocks are still cheap today. But, due to new circumstances, I’ve decided it’s time to take profits and sell.
In “How to make 80% from Japanese stocks,” I recommended the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ). It’s an exchange traded fund (ETF) that profits when Japanese stocks rise, but insulates (hedges) investors against movements in the exchange rate between the US dollar and the Japanese yen.
Before then, I had long been sceptical about Japanese stocks. But the situation changed, and so I changed my opinion. Japanese stocks were cheaper than ever. And I reckoned the yen would resume its weakening against the US dollar, after a short period of relative strength. Not least because it was Japanese government policy to weaken their currency.
Japanese stocks of large companies tend to rise most, measured in yen, when the yen is weak. This is because both their exports from Japan and overseas profits (e.g. from factories in the US or Europe) become worth more in yen terms. However, in such a scenario, an unhedged investment in Japanese stocks would take a hit from the weaker yen itself.
This means hedged Japanese stock investments like DXJ are best in an environment where the yen weakens. They’re also terrible in an environment where the yen rises and Japanese stock prices fall in yen terms. Here the investors get all the yen stock price fall but none of the currency gain.
That’s why, in the case of DXJ, I recommended using a stop loss. My recommendation was to automatically sell the investment if the price fell by more than 10%. I rarely recommend stop losses, since they make no sense for the kind of value investments I usually look for (after all, if something gets cheaper, you should usually buy more).
But, given the hedged structure meant more potential upside but also more downside risk if the yen went the wrong way, I recommended putting a stop loss in place. As it turns out, it wasn’t triggered.
DXJ has performed extremely well
This is how DXJ has performed since the recommendation:
That’s over 30%, including dividends but net of fees (and before any taxes due). A great result in a relatively short time.
Also, here’s a chart which compares the performance of DXJ (in blue) over the period with an…