“Growing pressure on companies to improve governance and increase shareholder returns is changing the corporate world in Japan for the better”, according to Simon Somerville, who has managed the Jupiter Japan Income Fund since its launch 10 years ago. “A strong earnings recovery story, combined with a tight labour market and burgeoning tourism levels could signal exciting times ahead for domestically-focussed companies”.
Flourishing corporate landscape
“The improvement in the corporate governance landscape is, in my opinion, the biggest story in Japan at the moment” says Simon. “The recently introduced Stewardship and Corporate Governance Codes have forced institutional investors to begin actively voting, meaning there is a lot more pressure from domestic investors on companies to do the right thing for their shareholders.
“This has forced managements to become more focused on return on equity, to look at the cash on their balance sheets and either return it to shareholders or plough it productively back into their businesses. The positive impact of these measures is already clear to see: dividends last year rose by 13%, and share buybacks soared by 79%; furthermore, this year Nomura estimates total shareholder returns will rise 14%.
“This focus on governance has been further augmented over the last 18 months by the Japanese Government Pension Investment Fund (JGPIF), which has increased its equity weighting from around 11% to almost 25%. Owning around 9% of the stock market, they are now the biggest shareholder in Japan – a key factor, in Simon’s opinion, in the pressure the government is putting on companies to increase returns to shareholders.”
Focus on domestic earners
Simon’s principal focus in his company analysis is on the corporates’ ability to generate cashflow, and this has enabled the Fund to benefit from the shareholder revolution, as those companies with strong cashflow generation are those who should be in the strongest position to increase shareholder returns.
Simon also looks at the competitive advantage of the companies, as well as the strength and accountability of their management. Typically conducting around 300 company meetings a year, Simon’s detailed understanding of the companies in his portfolio has helped him mitigate recent market volatility by concentrating on what he calls “domestic earners”: companies deriving the bulk of their earnings from within the country.