Japan - improving governance, emerging brands
Growth in neighbouring countries benefiting economy
Nicholas Price, Portfolio Manager, Fidelity Japan Trust PLC, 11 October 2018
One of the key developments we have seen on-the-ground in Japan over recent times has been a change in corporate mind-sets and a greater focus on creating value for minority shareholders. This has been brought about by an integrated set of policies designed to encourage greater capital efficiency and return on equity from Japanese companies.
The Stewardship Code, Corporate Governance Code and return on equity (ROE)-aware benchmarks have left traditionally conservative managements with no place to hide. There is now seemingly a concerted commitment to change and it is notable that Japanese companies are delivering record levels of cash to shareholders.
10 years ago, only a dozen Japanese firms released integrated reports explaining their plans to increase long-term corporate value. That figure jumped to 341 last year, according to data from KPMG Japan. Only 45% of companies listed on the first section of the Tokyo Stock Exchange appointed outside directors in 2008. That has since grown to 99.7%.
Clearly, taken together this is all very good news for investors in Japan as over time we should expect increasing return on equity to be reflected in higher share prices for those companies, particularly as valuations remain very attractive relative to other major developed equity markets.
The gateway to Asia
The focus on governance and more value accretive use of balance sheets is slowly becoming more widely recognised, but what is perhaps less well appreciated is the extent to which Japan is benefitting from the growth in neighbouring economies across emerging Asia.
Indeed, we have seen Japanese companies with strong brands nationally expand across the rest of the region. The rise in inbound tourism, which has grown by around 15%-20% in recent times, means that Asian - and particularly Chinese - visitors to Japan are increasingly aware of the best local brands, so when these companies go looking for new business in Asia they enjoy immediate recognition from consumers.
This backdrop is creating some interesting investment opportunities among selected companies. For example, Ryohin Keikaku, operator of the ‘no brand quality goods’ label Muji, is a company I have covered for over 20 years and it has subsequently expanded domestically and overseas. It did not do so well when it first went to the UK, but has since moved into Hong Kong, Singapore and China, accelerating its growth with the help of good merchandising. It’s been a key holding in the portfolio and a solid performer for me.
Elsewhere, Yamaha, the maker of musical instruments, is a good example of a company that is expanding and growing its presence into the Chinese market. It has a strong brand image and its management is raising margins by 1% a year. The Chinese market for musical instruments is still quite a lot smaller than that of the US and Yamaha’s large market share gives it a strong platform for growing along with the market. It is well-positioned to benefit as China’s middle class grows and the demand for luxury goods increases.
I also own Makita, which is one of the largest power tool manufacturers in the world. As lithium ion battery technology improves, the company has continuous opportunities to keep on adding value and achieving steady increases in its pricing. It is currently expanding into the gardening market and working on offering more environmentally-friendly tools with greater battery capacity, a move that could increase Makita’s market penetration by 50-60% over the medium-term.
Overlooked smaller companies
While these stocks are relatively large and well-known names, I also maintain significant exposure to smaller and medium-sized companies. The abovementioned focus on shareholder returns is often most pronounced among such companies as management incentives tend to be directly aligned with those of minority shareholders. Moreover, with almost half of the companies in the small and mid-cap space not covered by sell-side analysts, there remains a significant opportunity to identify overlooked potential through bottom-up company research.
Edison publish an initiation Research Note on Fidelity Japan Trust PLC - September 2018
Fidelity Japan Trust (FJV) has a bottom-up, research-intensive investment process, a flexible approach to gearing and a focus on stocks across the market cap spectrum that offer growth at a reasonable price (GARP)..
Read the full note here.
Changes to investment objective and company name
Shareholders have approved Board proposals to amend the Company’s investment objective to better reflect the portfolio manager’s investment approach to include a greater weighting to large market cap companies. This will allow greater flexibility to move between market capitalisation segments as opportunities arise in the future.
New investment objective:
The Company aims to achieve long term capital growth by investing predominantly in equities and their related securities of Japanese companies.
To reflect the change above and Nicholas Price’s focus on picking stocks with growth at a reasonable price, the Company has changed its name to Fidelity Japan Trust PLC.
The introduction of a variable management fee
The Board has also negotiated a new fee agreement with the manager, following Fidelity International’s announcement in October last year to offer its clients a Variable Management Fee.
As of 1 July 2018 the headline management fee of 0.85% of gross assets will be reduced to 0.70% of net assets per annum with a +/- 0.20% variation based on performance relative to the Reference Index. The maximum fee that the Company will pay will be 0.90% of net assets, but if the Company underperforms the Index, the overall fee could fall as low as 0.50%.
A change of reference index
The Board has considered a number of reference indices and has decided that the Company should move from using the Russell Nomura Mid/Small Cap Index to the TOPIX Index (Tokyo Stock Exchange TOPIX Total Return Index), the most widely used index representing the Japanese equity market and also the most inclusive index in terms of constituents.
A change of peer group
The Company will move from the Association of Investment Companies (“AIC”) Japan Smaller Companies peer group to the AIC Japan peer group.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.