Friday Highlight  

The evolution of investing in Japan

Stewardship and corporate governance codes have improved shareholder engagement and encouraged firms to pay out more to their shareholders in the form of dividends and share buybacks rather than hoard cash.

The positive impact of these efforts can be seen clearly and the Nikkei forecasts that annual dividends paid out by major Japanese corporations would hit a record 10.7tn yen in the year to March 2019, up 15 per cent year-on-year.

Meanwhile, share buybacks were predicted to rise 57 per cent to 4.6tn yen over the same period.

All-in-all, total shareholder returns were set to have doubled over just five years.

These new corporate codes have also sought to encourage company boards to increase research and development investment, raise return on equity, and improve transparency.

With the percentage of listed companies with two or more independent outside directors rising from 17 per cent to 91 per cent, these efforts seem to be working.

Looking for opportunities

Alongside the renewed prospect of returns for growth investors, Mr Abe’s focus on driving shareholder returns standards has created a new opportunity for income investors over the past decade.

While the Topix offers many opportunities, it is overburdened with larger ‘old Japan’ businesses that struggle to adapt to Japan’s new corporate governance culture.

Many firms outside the index have been more adaptable to change, realising returning excess cash and profits to investors is integral to success.

With this in mind, we take an index-agnostic approach, looking for stocks with talented owner-CEOs and robust, sustainable growth strategies.

Importantly, they must also reward shareholders with appropriate annual distributions, reflect underlying growth but also recognise the value to investors of the sustainability of dividends and share buybacks.

Despite Japanese businesses making substantial progress in the way they treat their shareholders, they still have some way to go.

Towards the end of last year, around 50 per cent of the country’s listed non-financial companies had net cash on their balance sheet, equating to over 117tn yen of unproductive assets.

As the corporate culture continues to shift, so too does the outlook for income investors in Japan.

Richard Aston is portfolio manager of the CC Japan Income & Growth Trust and the CC Japan Income & Growth Fund