If you speak to professional investors in Japan they will tell you that the country and its stock market are not what they used to be. And this is a good thing.
"When I first started, we were embarrassed to talk about shareholder returns in Japan because there weren't any," says Nicholas Weindling, manager of JPMorgan Japanese Investment Trust (JFJ), who has covered Japanese equities for 15 years. "But there have been a lot of changes. You get dividends and a dividend yield similar to US equities – something that used to be unthinkable. And I have conversations with companies that I didn't use to have – there's a real engagement. I can discuss return on equity with companies, whereas before their managements didn't even know what that was. And we think these changes are for real and will be long lasting."
There has been a change in Japan's corporate culture over the past five years. Prime minister Shinzo Abe's government implemented a corporate governance code and changed the way company managements approach shareholders and shareholder value. And the changes in corporate culture, alongside a resurgent economy in Japan and globally, have boosted the equity market. Japan's main stock index, the Topix, has risen 50 per cent over the past three years, just slightly behind MSCI World index.
The number of Japanese companies conducting share buybacks and returning capital to shareholders has grown year on year for the past six years, according to JPMorgan Asset Management. And so far this year share buybacks are up 25 per cent on 2017.
JPMorgan Japanese Investment Trust has also done well with net asset value (NAV) total returns of 21 per cent and 59 per cent over one and three years, against 10 and 50 per cent for the Topix index.
Part of the reason for the outperformance is because the trust differs from the index. Mr Weindling prefers mid-cap companies, and holds around 60 growth shares, typically for three to five years so that they have time to appreciate.
But the trust does have some similarities with other Japan funds. For example, JPMorgan Japanese Investment Trust's largest holding, Keyence Corporation (TYO:6861), is also among the top largest holdings of 38 other Japan funds. And Shiseido (TYO:4911) and Recruit (TYO:6098) are among the 10 largest holdings of this investment trust and 20 other funds.
But Mr Weindling argues that this is not because there is a lack of opportunities. And his preference for companies that operate in growing industries within which they are market leaders and are embracing the new corporate code, have also led him to less well-known Japanese shares.
"People know Japan for Toyota (TYO:7203), Honda (TYO:7267), Nissan (TYO:7201) and Panasonic (TYO:6752) – classic exporter stocks," says Mr Weindling. "But that is not where we think Japan's strength is. We're very aware of what has happened to Japanese consumer electronics and car manufacturers: they aren't losing competitive advantage – they lost it several years ago."
Although Mr Weindling picks stocks based on their individual merits rather than taking macro or sector views, he does take a thematic approach. For example, e-commerce is a big focus for him because Japan lags other developed nations in this area but is beginning to change. Although around 25 per cent of UK clothes shopping is done online, in Japan this is only 7 per cent.
"In Japan you see the same trends [as in other countries] but it is a few years behind," says Mr Weindling. "We look at what kind of models worked well in the UK, China, South Korea and the US because we think the same things will [succeed] in Japan."
Another theme is tourism. Only 8m foreign tourists visited Japan in 2012 but this had risen to 28m in 2017, due to growing wealth in neighbouring nations.
"Before 2012, we would not have even have looked at the hotel sector because Japan's population is falling and there were no tourists, which is a very bad outlook for this industry. But this change has meant we can look at a whole raft of new companies. Some of the stocks that have worked best for us have been ones benefiting from the increase in tourists."
One of his most recent additions, herbal medicine company Tsumura (TYO:4540), meanwhile, has excellent growth prospects due to expansion into China. But getting in early is key.
"If they can sell their product in China, profit isn't going to grow 10 or 20 per cent, it is going to grow three or five times," he says.
Japanese valuations are attractive. Due to a stronger economy, earnings capacity among Japanese companies has grown substantially. But despite the market rising 50 per cent over three years, the average price/earnings ratio has gone down.
"Compared with 20 years ago Japan looks cheap," explains Mr Weindling. "Price to forward earnings is on 13 times which is a discount to the US and Europe. It also looks good on dividend yield and on price to book ratio. Whatever metric you choose, Japan looks good."
Nicholas Weindling CV
Nicholas Weindling has been lead manager of JPMorgan Japanese Investment Trust since 2012 and has worked on this fund since 2007. He has also been lead manager of JPMorgan Japan Fund (GB00B235RG08) since 2012.
Mr Weindling is based in Tokyo and has worked in JPMorgan Asset Management's Japan equity team since 2006. Before this he worked at Baillie Gifford in Edinburgh where he covered UK and Japanese equities.
He has a degree in history from Cambridge University.
