Alex Crooke on Japan: Value Released from Corporate Change



The Bankers Investment Trust contains a broad mix of global equity stocks. We aim for a blend of small, medium, and large-sized firms, seeking those with strong and rising dividends as well as those with the potential for strong growth of earnings. In addition we take a view on asset allocation, apportioning our investor’s cash into different stock markets through the portfolio’s ‘sleeves’, where our regional fund managers pick stocks according to where they best find value and opportunity.

This means we can invest in every major stock market across the globe, and at certain times we will be more bullish on one region’s prospects over another’s.
Three years is often a good yard-stick for performance. Looking over the varying markets that the Bankers portfolio invests in – the UK, North America, Japan, Asia Pacific, Europe (ex UK), and Latin America – the underlying Japanese market has been a strong performer globally, coming-in second only in Sterling terms to the US, which contains a strongly self-sustaining domestic economy.
Within the Banker’s Japanese ‘sleeve’ stock selection has further added to performance, with picks coming from our Tokyo based Japanese fund manager, Junichi Inoue.
Plenty of investors focus, more bearishly, on ageing populations, poor profitability and disinflation, and have tended to underplay the region. For Bankers the allocation to this sleeve is overweight to both the index and significantly our peers. Our investment thesis is centred on the belief that corporates are undergoing a variety of significant positive changes, and that this is enabling them to release value from decades of poor capital allocation and governance.

Extracting value
The first change lies in the shifting corporate mentality towards generating shareholder value.
In the past Japanese firms have tended to hoard cash on their balance sheets, leading to either under-investment in capital expenditure and falling global market share, or over-diversification into competing firms and maligned business areas, creating highly fragmented industries where businesses resist mergers or become buried in a quagmire of non-core assets.
Cheap labour has compounded poor investment decisions - access to large pools of cheap available labour has reduced returns by encouraging management to needlessly add capacity.
The broader effect has been to produce low rates of return on equity (ROE), reducing profits and discouraging investors to the detriment of share price returns.

We believe this issue of shareholder value is now being seriously addressed. Since the country’s Prime Minister, Shinzo Abe, unleashed his “three arrows” of economic reforms - often referred to as ‘Abenomics’ - Japanese firms have started to adopt much more western corporate thinking. Cross-holdings are being unwound and non-core assets sold; boards are choosing to hand back cash where appropriate, as can be seen in rising dividends, pay-out ratios and share buy-backs; and firms are now taking a much more cautious approach to labour investment amid increasing shortages.

A long needed shake-up
The second area is corporate governance. Many firms have been guilty of nepotism and a lacking in meritocracy in the past, where age and tenure has become the primary driver of salary and progression. Mr Abe has taken aim at these areas as well, attempting to introduce greater boardroom checks and balances.
In 2014 Japan’s financial regulator introduced the ‘stewardship code’ which directed asset managers and investors as to how they should engage with firms more responsibly; in 2015 the government introduced the corporate governance code, encouraging firms to have at least two independent directors on their boards. The chart below demonstrates growing board independence.

The attempts of Mr Abe and corporates alike are very encouraging, and if firms continue to focus on the value they can create for shareholders we expect increasing investor participation in Japanese stocks. Indeed Japan’s stock market is attempting to revitalise interest in its companies for these reasons, creating an index of 400 leading firms with high investor appeal by departing from the traditions of simple market-cap weightings to include measures of corporate governance and profitability. 
In the Bankers portfolio our continuing focus will be on stock selection, seeking quality companies with strong drivers in place for future earnings growth. And with valuations appearing inexpensive both relative to history and wider markets we expect good stock selection to add to performance for our investors for some time to come.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Important information

Please read the following important information regarding funds related to this article.

The Bankers Investment Trust PLC

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • Derivatives use exposes the trust to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets and can be affected by local political and economic conditions, reliability of trading systems, buying and selling practices and financial reporting standards.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Where the trust invests in assets which are denominated in currencies other than the base currency then currency exchange rate movements may cause the value of investments to fall as well as rise.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • All or part of the trust's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.

Risk rating


Important message