Since the global financial crisis, investing in Japanese companies has changed dramatically, according to Richard Aston, manager of CC Japan Income & Growth Trust (CCJI).
“That was the first time we started identifying Japanese companies with dividends that were comparable, if not superior, to the international peer group,” he says. “Companies were awash with cash and took the decision to distribute more of that cash to their shareholders, displaying a very different attitude to what they would [have done] 10 or 15 years before that.”
The ultra-low interest rates brought in as part of measures to stimulate the economy led to pitiful saving rates. This has served to encourage Japanese companies to pay out more dividends to satisfy and create investor demand, and in turn boost their share prices.
The reformist policies driven by Japanese Prime Minister Shinzo Abe since his election in 2012 have only quickened the change in corporate culture. For example, Japanese authorities introduced a new corporate code in 2014 aimed at shifting businesses away from traditional structures towards shareholder-friendly policies.
Meanwhile, the introduction of an index that focuses on improved corporate governance is increasing pressure on management to change. The JPX-Nikkei 400 index was launched in 2014 and is composed of companies that demonstrate efficient use of capital and investor-focused policies.
“More important is that companies are paying more attention to dividends, and increasingly offering a dividend that will rise in periods of prosperity and the opportunity for a stable dividend in tougher periods,” Mr Aston adds.
CC Japan Income & Growth has been seeking to take advantage of Japan’s growing income market since its launch in December 2015. It aims for income and capital growth by buying stocks, but also via exchange traded funds (ETFs) and Japanese real estate investment trusts (J-Reits).
Since its launch, the trust’s share price has delivered 63 per cent, beating both the Topix Index, which made 39.4 per cent, and the Association of Investment Companies Japan sector average of 52.4 per cent. The fund has a market capitalisation of £205m and is trading on a premium to net asset value (NAV) of 5.2 per cent as of 5 September, according to Winterflood Securities. It has a yield of 2.2 per cent.
The trust invests in a relatively concentrated portfolio of 30 to 40 stocks. Mr Aston says he likes companies with good growth prospects, strong balance sheets and surplus cash, but importantly a favourable attitude to deliver returns via sustainable and growing dividends, and share buyback policies. He will sell stocks if there is a change in their growth prospects or if the valuation of the stock results in its yield becoming unattractive.
A recent example is Solasto (6197:TYO), a medical services provider, which listed on the Tokyo Stock Exchange two years ago with a strong yield, but has performed strongly since then. Mr Aston says: “We felt that the valuation did not justify the growth we were expecting. It was purely a valuation-driven decision, as there is nothing wrong with the fundamentals.”
Although Mr Aston selects stocks on their individual attributes rather than making macro-economic or sector-based choices, the fund has high sector weightings to information and communications, and services companies, which make up 16.6 per cent and 15.3 per cent, respectively. A recent acquisition within these sectors is IT service management company Avant Corp (3836:TYO), which he bought because of its good dividend growth prospects. Another recent buy is Secom Co (9735:TYO), a provider of security services with a strong position in its domestic market and good international growth prospects.
However, Japan is more exposed than other developed markets to a potential slowdown in global growth. "We are very concerned about the implications of global trade wars,” Mr Aston says. “Japan does have some domestic growth prospects, but I don’t feel that those are strong enough to offset against any strong downturn overseas.”
However, the country's recent free trade agreement with the European Union offered some good news. It could become the largest bilateral trade pact if approved by the Japanese parliament. And once implemented it would mean the ratio of goods that are subject to tariffs would fall to zero, boosting the Japanese domestic economy by approximately 1 per cent or ¥5trn (£34.8bn).
Meanwhile, Mr Aston says he's trying to mitigate the risk of slowing global growth through careful stock selection. He says: “We look for companies that we believe can grow over time. [The companies we hold] that have some exposure to international growth tend to be companies in strong markets and have very strong market positions as they are those that have international competitiveness. We’ve seen companies with those characteristics continue to perform throughout the cycle.”
