Alex Crooke on Japan: Value Released from Corporate Change

05/07/2017

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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.

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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.

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Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which 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 incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

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