Artemis’s Simon Edelsten has ramped up his exposure to Japanese stocks to take advantage of a growing trend of companies returning cash to shareholders.
Japanese companies had historically retained a large proportion of their profits on their balance sheet, leading the market to be largely shunned by any investor seeking an income.
But a sea-change in corporate governance has led to an increasing number of companies embarking on large payouts to shareholders so far this year.
Mr Edelsten, co-manager of the £45m Artemis Global Select fund and the £76.4m Mid Wynd International investment trust, said he had sought to capitalise on this trend by upping his already high exposure to Japan.
Between the end of January and the end of February, the Japan weighting in the Global Select fund was raised from 11.1 per cent to 12.5 per cent, while it was raised from 10.8 per cent to 13.3 per cent in the Mid Wynd trust, according to Artemis factsheets.
Mr Edelsten said he was continuing to add to Japan in anticipation of a re-rating in stocks that have started returning more cash to shareholders.
The move has already served Mr Edelsten well so far this year as the fund has benefited from Japan being one of the strongest performing markets in 2015.
The fund has outperformed its IA Global sector and MSCI AC World index benchmark by more than 3 percentage points so far this year, putting the trust into the top quartile for performance in the past year. Mr Edelsten said he had always tended to invest in Japanese companies with high cash levels and strong balance sheets, which has now begun to pay off as these are the companies ramping up their payout ratios.
The manager said the trend had come about in the form of a domino effect, as a few companies started upping their payouts it “forced the rest to up their game”, according to Mr Edelsten.
“They all seem to have got the message now”, he added.
However, the manager pointed out Japanese companies still only had a 30 per cent payout ratio on their earnings on average, which was “a lot less than the rest of the world”, so he thinks Japanese payouts should continue to grow.
He hoped the change in attitude to returning cash to shareholders would tempt back the large number of investors who “are still sceptical about Japan”.
Investors flocked to the market in 2012 when prime minister Shinzo Abe was elected prime minister on a platform of extensive and radical reforms, but Mr Edelsten claimed many of those investors have since “got bored” and sold out as Mr Abe’s economic plans proved difficult to fully implement.
Although he has a bullish outlook on Japan, Mr Edelsten said he has positioned his portfolio cautiously for 2015, expecting a much more difficult year than in 2014.
He has set up his portfolio to be resilient in the face of what he expects to be a sharp sell-off if and when the US raises its base interest rate, though he admitted he was an “unapologetic early mover” with such a defensive call.
