SCHRODER JAPAN TRUST: Demand helps fund deliver 14% return in year

While Japan may be concerned about China’s intentions toward its southwestern neighbor Taiwan, its economy is in good health.

Unlike the UK, both inflation and wage growth are currently under control, adding to an atmosphere of optimism about both the economy and the direction of corporate earnings.

It’s a background that according to Masaki Taketsume, fund manager of investment fund Schroder Japan, is conducive to making money from the stock market.

“The Japanese economy is in good shape,” he says, “thanks to pent-up consumer demand now that the country has emerged from lockdown. With higher wages giving people more purchasing power and broader inflation allowing Japanese companies to drive up their prices, there are some strong winds driving corporate earnings.

He adds: “The political backdrop is stable and while geopolitical issues are always on our minds, we don’t let them affect the portfolio we’ve put together.”

Taketsume, who has just moved to Tokyo after a long stint at Schroders in London, is also excited about the steps many Japanese companies are taking to become more shareholder friendly. This results in a greater focus on earnings growth – and dividend payments to shareholders, as companies reduce the amount of cash held on their balance sheets.

He says key trustholdings like conglomerate Hitachi and retailer Seven & I are completely different companies than they were in the past.

“Hitachi is unrecognizable to the company it was ten to fifteen years ago,” Taketsume adds. “It has moved into new exciting business areas such as green energy and infrastructure. As earnings and earnings rise, at some point the share price will be revised upwards by the broader market. Seven & I has benefited from a boardroom that is now entering into a dialogue with shareholders.’

Listed on the UK stock market, the trust has assets of £267 million and currently owns 64 shares, including names familiar to UK investors such as beverage producer Asahi and car giant Toyota.

The performance figures are better when viewed in relative terms rather than in absolute terms. Over the past three years, it has posted returns of 44 percent, outperforming all of its Japanese peer group. In the past year it has achieved a total return of 12 percent – a figure surpassed only by Abrdn Japan.

Reflecting the propensity of Japanese companies to pay a dividend, the trust paid an income of 4.9p per share in the past financial year – with the shares now trading at around £2.20. Taketsume says the key to the trust’s continued success is input from Schroders’ internal analysts, who are constantly looking for new investment opportunities. “Their research gives us a competitive advantage,” he adds. “They are vital in identifying management changes that could impact a company’s prospects.” The fund’s annual fees total 0.92 percent and the exchange ID code is 0802284. The market ticker is SJG.

Increased confidence in the Japanese stock market has prompted London-based investment boutique Zennor Asset Management to launch a Japan Equity Income fund. James Salter, co-fund manager, says: “Companies in Japan are under pressure to downsize their balance sheets. This provides a powerful tailwind for dividends.”

Investment house Hawksmoor is also bullish on the market – both from a valuation perspective (it’s cheap) and improving governance. Fund manager Ben Mackie says, “After a few down days, the sun seems to be rising on a new era for Japanese business.”