“Growing pressure on companies to improve governance and increase shareholder returns is changing the corporate world in Japan for the better”, according to Simon Somerville, who has managed the Jupiter Japan Income Fund since its launch 10 years ago. “A strong earnings recovery story, combined with a tight labour market and burgeoning tourism levels could signal exciting times ahead for domestically-focussed companies”.
Flourishing corporate landscape
“The improvement in the corporate governance landscape is, in my opinion, the biggest story in Japan at the moment” says Simon. “The recently introduced Stewardship and Corporate Governance Codes have forced institutional investors to begin actively voting, meaning there is a lot more pressure from domestic investors on companies to do the right thing for their shareholders.
“This has forced managements to become more focused on return on equity, to look at the cash on their balance sheets and either return it to shareholders or plough it productively back into their businesses. The positive impact of these measures is already clear to see: dividends last year rose by 13%, and share buybacks soared by 79%; furthermore, this year Nomura estimates total shareholder returns will rise 14%.
“This focus on governance has been further augmented over the last 18 months by the Japanese Government Pension Investment Fund (JGPIF), which has increased its equity weighting from around 11% to almost 25%. Owning around 9% of the stock market, they are now the biggest shareholder in Japan – a key factor, in Simon’s opinion, in the pressure the government is putting on companies to increase returns to shareholders.”
Focus on domestic earners
Simon’s principal focus in his company analysis is on the corporates’ ability to generate cashflow, and this has enabled the Fund to benefit from the shareholder revolution, as those companies with strong cashflow generation are those who should be in the strongest position to increase shareholder returns.
Simon also looks at the competitive advantage of the companies, as well as the strength and accountability of their management. Typically conducting around 300 company meetings a year, Simon’s detailed understanding of the companies in his portfolio has helped him mitigate recent market volatility by concentrating on what he calls “domestic earners”: companies deriving the bulk of their earnings from within the country.
Of the 45 stocks in the Jupiter Japan Income Fund currently, just under 80% have this domestic focus. Where he does hold exporters, concerns over global growth and the sharp slowdown in manufacturing have led Simon to avoid companies with direct exposure to China, looking instead for companies doing business in the US market such as Fuji Heavy – better known to the Western world as the maker of Subaru cars.
Another example in the portfolio is tyre maker Bridgestone – a US oriented company with little exposure to China. The fund’s small cap exposure has also assisted recent performance, with Nomura, a leading design company, and Technopro, one of Japan’s largest technical staffing service companies, both strong performers in recent months.
Tourism levels continue to rise
Japan’s tourism numbers have skyrocketed in recent years, rising at an almost 40% compound rate over the last two years. Simon believes the reasons for this are twofold: “The weaker yen is an obvious attraction for inbound tourism from around the world, and alongside this Chinese consumers are getting to an income level where they want to go travelling; Japan, being nearby and relatively cheap is an obvious destination to choose.”
Not only are tourism numbers rising, but tourists are spending, offering further support to the domestic economy.
Simon continues: “Chinese tourists do not just make up the largest segment of visitors to the country, their number is also growing at the fastest rate, and on average they spend more than any other nation.
Encouraged by a weaker yen and distrust of the quality of products in their home country they are buying in bulk, spending more than Europeans, more than Australians.” Positions in the fund such as Casio watches play into this trend, while JAL, Japan’s national airline has further benefitted from low oil prices.
As Simon celebrates ten years at the helm of the fund, he is enthusiastic about upcoming opportunities in the country: “As a country Japan has always shown immense promise, and I believe this upsurge in corporate responsibility and shareholder friendliness is just what investors have been waiting for.
With earnings expected to grow 15% this year, benefitting from the weak yen and lower commodity prices, and valuations now seeming attractive, I believe Japan should be overall well set for a recovery once nervousness in the markets dissipates.”