A governance revolution is reinvigorating corporate Japan. Companies are under increasing pressure from regulators to reshape and shrink their balance sheets, which are in many cases in rude health. This provides a powerful tailwind for dividends and share buybacks – and is likely to have a positive impact on share prices too. A story that is unique to Japan, this backdrop offers a convincing opportunity for investors, particularly income-seeking ones, to benefit early from meaningful long- term change.
“Japan is an increasingly compelling place to invest for equity income investors. Many Japanese companies are awash with cash which should gradually be returned to shareholders through increased dividends and share buy-backs.”
David MitchinsonPortfolio Manager
Aims to deliver capital growth and a rising income stream from a portfolio of Japanese equities
Invests across the market spectrum with a particular focus on smaller companies
Experienced team of stock-picking fund managers with their own extensive network in Japan
James spent his early career managing Japanese equities initially at Foreign & Colonial before stints at Martin Currie and Schroders. He joined Polar Capital as a founding partner in 2001, where he subsequently worked for 19 years before founding Zennor Asset Management in 2020.
CFA
4 years
35 years
David started his career at Framlington in 1998, managing a Japan fund before joining JPMorgan and moving to Tokyo in 2004. On leaving JPMorgan in 2013, he spent just over two and a half years with the Abu Dhabi Investment Authority, returning to the UK with TT International in 2016. He joined Zennor in 2020.
CFA
4 years
25 years
After another strong month the Japanese broader market has produced the best quarter since the bubble ended in 1989. A close to +20% move ranks as one of the strongest the Zennor team have ever witnessed. The Yen weakened marginally despite the Bank of Japan (‘BOJ’) ending negative interest rates. Value outperformed growth by close to 300 basis points. A more domestic feel to the market saw Real Estate, Construction and Insurance sectors perform particularly well. Rising real estate prices and a belief that the hiking of interest rates will be a gradual process saw interest come back to the sector. Banking stocks fell initially on the news but rallied thereafter as some investors thought that Mr Ueda, the BOJ governor sounded more hawkish in the press conference after the announcement. Alpha generation this month was very strong. We look forward to speaking in more detail about specific performance next month after the fund’s one year anniversary.
We established a new position in a regional bank called Hachijuni (8359). Its stock portfolio is worth ¥700bn versus its own market capitalisation of ¥534bn. One of their stock portfolio holdings, Shin-Etsu Chemical, is worth ¥380bn alone. Shin-Etsu is a leading silicon wafer and PVC producer which at over 20x earnings and a dividend yield of 1.5% is not cheap enough for the portfolio. Through buying the bank we are hedging ourselves against further performance from the technology sector where we are underweight. Hachijuni yields 2.3% and trades on less than 0.5x book value. We continued to add to HI-LEX (7279), which is somewhat controversial as part of their business is open to threat from electrification of vehicles and the door modules and window regulator business is lower margin than electric cabling. However, the balance sheet is very robust, and the shares are the cheapest rated in our EV/OP technical screening. HI-LEX yields 2.4%, trades at 0.3x book and holds ¥112bn of cash and investments compared to a market capitalisation of only ¥64bn.
The portfolio overall trades on 14x earnings and 0.85x book, which are both decent discounts to the overall market.
We found out from an interview with one of our largest holdings, MS&AD (8725) that they will be selling down close to $3bn of strategic holdings over the next four years. The extra return to shareholders will equate to a further 3% total payout ratio making an 8% annualised ratio now in sight. Further news of cross shareholding unwinding came on the last trading day of the month with Denso, an auto parts company in the Toyota group announcing that it will sell its entire 9% stake in Toyota Industries over 2½ years. Toyota Industries has 110% of its market capitalisation in long term securities. We expect that the company will look to buyback shares that become “loose” as a result of the Toyota group restructuring, and that the company will in turn look to unwind its large war chest of securities.
We were encouraged by the initial “Shunto” wage negotiations which indicate headline wage growth of +5.3%. On March 19th the BOJ officially ended its negative interest rate policy and removed all mention of yield curve control. By moving to short term interest rates as a primary tool they signalled a clear departure from ten years of abnormal monetary policy. They also decided to cease buying exchange traded funds and REITs. Whilst policy will remain accommodative our suspicion is that this is a watershed moment which when we look back could prove pivotal for a stronger yen and have significant impact globally if Japanese investors decide to repatriate foreign assets.
1MS&AD Insurance | 4.8 |
2Toyota Industries | 4.6 |
3Asahi Yukizai Corp | 4.1 |
4Sintokogio | 3.9 |
5SMTH | 3.7 |
6Kurimoto | 3.7 |
7Bewith | 3.7 |
8Toda Corp | 3.5 |
9Fuji Media | 3.2 |
10Artience | 3.1 |
11Kyoto Financial Group | 2.7 |
12Dai Nippon Printing | 2.7 |
13Pasona | 2.7 |
14Koike Sanso Kogyo | 2.6 |
15Tsi Holdings | 2.5 |
16Toyo Seikan | 2.4 |
17Nippon Soda | 2.4 |
18Fukuda Denshi | 2.4 |
19Daiwa Industries | 2.3 |
20Hirano Tecseed | 2.3 |
Industrials | 42.2 | |
Materials | 18.4 | |
Financials | 14.8 | |
Consumer Discretionary | 8.3 | |
Information Technology | 5.2 | |
Health Care | 3.8 | |
Communication Services | 3.2 | |
Real Estate | 1.9 | |
Cash | 2.2 |
Japan | 97.8 | |
Cash | 2.2 |
IA Sector | IA Japan |
Launch date | 24 April 2023 |
Fund type | UK Domiciled OEIC |
Dividend frequency | Biannually |
Country of registration | UK |
The Fund aims to provide income, with the potential for capital growth over any five-year period after all costs and charges have been taken.
Dealing line | 0345 922 0044 |
Administrator email | |
Dealing frequency | Daily |
Price frequency | Daily |
Settlement terms | T+3 |
Dealing cut-off time | 17:30 UK time T-1 |
Valuation point | 8:30AM UK time |
Client services line | 0345 922 0044 |
Client services email |
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