Talking Point  

Quilter Cheviot fund boss is investing in Japan for income

Quilter Cheviot fund boss is investing in Japan for income

Investors with income in mind should focus on Japan and UK value equity funds in 2021, according to Nick Wood, head of investment fund research at Quilter Cheviot.

Mr Wood said the Japanese equity market has never been viewed as an attractive place for income investors, but regulatory changes in that market mean the outlook for dividends has improved, while the fundamentals of the economy are strong.

He said: “Japan has rarely been bought with income in mind, but investment in the region has a number of benefits. Firstly, dividends in Japan are both well covered and growing.

“Japan has dealt with Covid much better than the West, with deaths in the low thousands – an even more remarkable statistic when you bear in mind that over 2m people are over 90. 

“That has meant the domestic economy has returned to normality more rapidly. Many Japanese companies have long been criticised for holding too much cash on their balance sheets but in this environment, it has left them in a strong position.

“Most didn’t need to cut their dividend, whilst now they can look to use capital to increase dividends or use for investment and growth.

"The improvements in corporate governance in Japan will also likely drive companies to continue to increase dividend pay-outs as a means of reducing cash balances. Japan remains a global market leader in many areas such as automation and robotics, and it is possible to both combine a higher yield with exposure so some excellent long-term growth trends.”

The fund he favours for Japanese exposure is Baillie Gifford Japan Income Growth, which he said has a yield higher than that presently offered by the wider market, but also has a focus on companies that are growing quickly

Turning to the UK, Mr Wood said: “If there are two areas most would accept as looking relatively cheap today, it’s the UK and value stocks”. The fund he favours for this exposure is the JO Hambro UK Dynamic equity product, run by Alex Savvdes. 

He said: “Whilst not being an income fund per se, companies held are generally required to pay a dividend as a way of signposting good capital allocation."

The fund, run by Alex Savvides since launch in 2008, is described as looking for companies for whom the growth potential is yet to be fully appreciated by the market, while the manager also describes the process as ‘value plus’. Mr Savvides has an enviable track record since inception, outperforming nine out of the past 12 calendar years to end of 2019.

“Unfortunately, 2020 has proved to be the fund's weakest in relative terms, but it therein lies the opportunity.

“While the fund has always had somewhat of a value bias, it certainly isn’t as extreme as some, and we believe the combination of the manager’s skill and potentially a more favourable environment in the UK for value managers.