InvestmentsFeb 24 2015

Somerville’s Japan Income fund bounces back

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Somerville’s Japan Income fund bounces back

A radical change in the way Japanese companies operate has propelled Jupiter’s Simon Somerville back to the top of the fund-performance charts after a challenging 2013.

The manager of the Jupiter Japan Income fund had produced bottom-quartile performance in 2013 as he refused to buy the high-beta recovery stocks that led to Japan’s huge 50 per cent rally of that year.

But his focus on companies with strong cashflow and balance sheets has begun to pay off as a shift in capital management mentality at Japanese businesses has led to a raft of companies returning cash to shareholders.

One of the policy strands of Abenomics – the phrase used to describe prime minister Shinzo Abe’s efforts to reform Japan –has been to bring the standards of corporate governance up to the levels seen in the Western world.

Mr Somerville said various measures to bring this change about have now led companies to start raising their dividend payouts and embarking on share buybacks in order to return to investors cash that firms have historically hoarded.

These shareholder-friendly policies have come from companies that have had a good cashflow and a lot of cash on the balance sheet – the sort of firms Mr Somerville holds.

The positive market reaction has meant his Japan Income fund has begun to outperform.

The vehicle has rocketed into the top quartile in the past six months after being in the bottom quartile of the Investment Association Japan sector during the previous three years due to its underperformance in 2013.

He said 33 per cent of the firms in his fund had announced share buybacks in the past year and they had largely been well received by the market.

“In 2014, share buybacks were up 82 per cent year on year,” Mr Somerville said. “I guess that will have accelerated in January and February. It is a very strong reason for why the markets are reaching new highs.”

Even though Japan entered a recession in mid-2014 and concerns have mounted that the whole process of Abenomics may fail to jolt the country out of its long slump, the Japanese stockmarket has edged closer to a level not seen since 2000...

However, Mr Somerville said a potential stumbling block could come from the current negotiations between Japanese businesses and trade unions about annual pay rises. He predicted anything less than a 1 per cent increase for the nation’s workforce could lead to markets losing faith in Abenomics.