iShares Japan Equity Index: March 2025 fund update

• BlackRock has been managing index portfolios since 1971

• This fund provides low-cost exposure to a variety of companies in Japan

• It’s closely tracked the FTSE Japan Index since launch

• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The iShares Japan Equity Index fund invests in Japan, home to some of the best-known businesses on the planet, including Toyota, Sony, and Nintendo to name a few. This fund invests in company shares of all sizes and across a variety of industries.

An index tracker fund is one of the simplest ways to invest and can be a low-cost starting point for an investment portfolio aiming to deliver long-term growth. We think this fund could be used to diversify a global portfolio or could be a good addition to a portfolio of tracker funds.

Manager

Dharma Laloobhai is Co-Head of BlackRock’s EMEA Index Equity International Portfolio Management team. She’s responsible for fund managers based in London who manage developed and emerging market iShares equity index funds and ETFs.

Every equity index fund at BlackRock has a primary, secondary and tertiary manager, who each have the ability to run the fund, along with the wider team. The wider team is well-resourced and experienced in index investing.

BlackRock’s global approach allows them to work closely with their teams across the world, aiding more efficient management of their funds. We have positive conviction in BlackRock’s ability to provide simple and effective tracking options for investors.

Process

This fund aims to track its benchmark, the FTSE Japan Index, by investing in every company in the index, and in the same proportion. This is known as full replication and helps the fund closely match the performance of the index.

The fund invests in around 500 Japanese companies across a range of different sectors. Industrials and consumer discretionary make up nearly half of the fund, with the rest spread across other sectors such as financials, technology and healthcare. Most of the fund is invested in large and medium-sized companies, but also some smaller companies in line with the benchmark. Smaller companies are usually subject to more extreme share price movements, and this can increase risk.

Keeping costs low is a key part of the team’s strategy to track the index closely. The fund managers communicate with local teams in Japan to ensure trades are placed at the best price, keeping costs low.

The fund can lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to offset some of the costs of running the fund. Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients. Even so, stock lending adds risk.

The fund has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently.

Culture

BlackRock is currently the largest asset manager in the world, running around $11.6trn of assets globally as of December 2024. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As the world's largest asset manager, and with lots of resource and knowledge under its belt, BlackRock benefits from unique access to the marketplace, which can help reduce trading costs. BlackRock is also a pioneer in the passive investment space and has a track record of innovation in this part of the investment market.

The team running this fund works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG Integration

BlackRock was an early signatory to the PRI and has offered ESG-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.

BlackRock’s Investment Stewardship Team aims to vote at 100% of meetings where it has the authority to do so. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function.

BlackRock has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes.

BlackRock raised further concerns in 2022 when it indicated it might support fewer shareholder proposals based on environmental and social issues in the future. However, its support for shareholder resolutions has fallen dramatically, from 40% in 2021 to just 4% in 2024. BlackRock argues that many of the resolutions were overreaching, lacked economic merit or didn’t promote long-term shareholder value, but this reasoning has been met with some scepticism.

Of the funds under HL’s research coverage, this fund has one of the highest ESG risk profiles. The companies within the fund could therefore face increased regulatory scrutiny, reputational damage, and operational challenges, potentially impacting the fund's future performance.

However, the fund’s composition represents the exposure of the FTSE Japan Index, and the team has no control over the companies included in this passive fund. Although, an ESG version of the fund is available.

Cost

The fund usually has an ongoing annual fund charge of 0.08%, but we’ve negotiated a 0.02% saving so it’s available to HL clients for 0.06%. We believe this is excellent value when compared with other passive funds in this sector. This is also one of the lowest cost funds on the HL platform for passively tracking the Japanese market.

Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Since the fund launched in July 2005, it’s done a good job of tracking the FTSE Japan Index. Over the last 10 years, the fund has risen 108.21%* versus 114.99% for the index. As you would expect from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund. However, the tools used by the managers have helped to keep performance as tight to the index as possible. Remember, past performance isn’t a guide to the future.

The fund has tracked the index well over the past 12 months and returned 1.84%. The financials sector contributed the most to the fund’s performance, followed by industrials. Whereas technology, healthcare and basic materials were the main detractors from performance.

One of the key events over the year was when the Bank of Japan (BoJ) raised interest rates for the first time since 2007 and ended eight years of negative interest rates. The BoJ have continued to raise rates, although slowly, and rates are currently at their highest level in 17 years. This is different to most other major central banks which are lowering interest rates.

Japan’s main stock market hit a record high during the year, driven by strong corporate earnings and a weak Japanese yen. A weaker yen makes Japanese goods more attractive to overseas buyers, which has benefited companies that export more of their goods abroad. Ongoing corporate governance reforms have also had a positive impact on companies in Japan.

Although there was some volatility throughout the year, especially in August when the main Japanese stock market had its largest daily fall since 1987. Rising interest rates and a rising Japanese yen pushed borrowing costs higher which led to a sharp fall in markets. While the market falls were swift, they later recovered.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the FTSE Japan Index closely in the future, though there are no guarantees.

The period between 29 February 2020 and 28 February 2022 reflects the performance of the D Class version of the fund. Performance from 28 February 2022 onwards reflects the performance of the S class version of the fund. This is due to when each share class was launched.