Focus on Asia – Why ‘Cash is King’ in many ways for GAM in Japan

When it comes to Japanese equities, a lot of considerations revolve around the issue of ‘cash’, whether it is cash on corporate balance sheets, companies’ free cash flow yields, or indeed Japan’s own currency and its future direction.

Ben Williams (pictured), investment director at GAM and manager of its Japan funds, is generally optimistic about prospects for Japanese companies – to make more shareholder friendly use of their cash, to tackle challenges presented by the yen’s relative valuation, and to offer opportunities for him to put his own clients’ cash to work.

His optimism about the future is reflected in one cash measure of his own – a low 0.5% cash holding in his fund.

When it comes to investing in the equity market, he says free cash flow yield is a key metric to concentrate on – and Japanese companies enjoy some of the highest rates in the world.

Measured on a rolling 12-month period to the end of September 2011, they generated a free cash flow yield for investors of 6.3% – not bad, as this period included the period immediately following the earthquake and tsunami of mid-March 2011.

Running the same analysis to March 2012, and based on current share prices, the yield rises to around 9%. In America the same analysis produces 6%, for Europe lower again at 5.5%, and for emerging markets yet lower at near 3%.

Japanese companies are no different to many of their international peers in having high cash levels currently, and for Topix index constituents cash piles are equivalent to 27% of their market capitalisation.

Many companies’ reticence to distribute more of this in the past has been one key reason the market has failed to attract more investors, and so underperformed the rest of the world, says Williams.



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