Japan funds are hot again. Close your eyes and you might miss it.

U.S. mutual funds that invest in Japan had tremendous growth during the month of August, pulling in most of the sales in the international fund category.

Sales for sector funds like Japan funds are driven by performance alone and returns on Japan funds this year have been spectacular, almost Internet fund-like.

Japan funds pulled in $673 million for the month of August, their best month ever, according to Financial Research Corp. of Boston. That was 91 percent of all the money that went into international funds, according to FRC.

Without the success of Japan funds, the international category was sure to have fared poorly as it has all this year. In July, international funds suffered $3.3 billion in net redemptions, and there have been $8.5 billion in net redemptions from international funds since the beginning of the year through Aug. 31.

Investors have been avoiding international funds mainly because domestic funds are providing great returns, and investors have no reason to look abroad for a product providing less return on their money, according to David Haywood, an analyst with FRC.

Domestic equity funds pulled in $5.8 billion in August, and net-inflows into those funds have totaled $104.7 billion for the year through Aug. 31, according to FRC.

The success of these funds compared to international funds makes sense when one looks at benchmark performance.

The S&P 500 has returned 39.83 percent over the last 12 months ending Aug. 31, while the Morgan Stanley Capital International Europe, Australasia, Far East Index (the MSCI EAFE) has returned just 25.97 percent over the same period, according to Wiesenberger of Rockville, Md.

While investors have pummeled international funds, a large share of the Japan sector's success can be attributed to Fidelity's own success investing in Japan. The best performing Japan fund has been the Japan Small Company Fund of Fidelity Investments of Boston, which has had a year-to-date return of 149 percent as of Aug. 31, according to Wiesenberger. That fund brought in $170 million in August, according to FRC.

The second most popular fund was another Fidelity product, Fidelity Japan Fund, which pulled in $66 million, according to FRC, and had a year-to-date return of 66 percent, according to Wiesenberger.

The MSCI EAFE includes stocks from 21 countries outside North America, and Japan was nearly single-handedly responsible for the strength of the 12-month return of the index. The 12-month return for the MSCI EAFE was 25.97 percent as of the end of August. But without representation from Japan, the return was only 16.65 percent.

Japan has been pulling all the weight abroad, and the sector is now being rewarded, even though inflows have been spotty because investors have been chasing short-term performance. In June, Japan funds brought in $625 million, but in July, they brought in only $109 million. In May, they actually lost $33 million. Year-to-date, Japan funds have brought in $1.8 billion, according to figures from FRC.

Fidelity's success in Japan may have a lot to do with the fact that many of these sector products are oriented toward the direct investor. Many financial intermediaries are not willing to put their clients into volatile sector funds such as a Japan fund because if the fund performs poorly, the broker usually has to face an angry investor, said Haywood.

"Advisors don't necessarily want to put their investors in a high-risk product," Haywood said.

In general, investors seeking to invest in sector funds such as Japan funds are not very concerned about asset allocation, are not phased by volatility, and are looking for large gains over a short period of time.

"Those types of products are all performance-driven," Haywood said.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.