Upon being re-elected Prime Minister in 2012, Shinzo Abe vowed to stimulate growth through a suite of reforms, the "three arrows" of Abenomics. The first and second arrows were deployed in 2013, and focused on injecting money into the economy to stimulate growth. The third arrow, targeting long-term reform, was fired in the middle of 2014.
Simon Somerville, manager of the Jupiter Japan Income Fund, views this third arrow as a great opportunity for investors. In an attempt to improve the earning power of the economy, attention has shifted onto domestic firms. This plays into Simon Somerville's strategy of investing in companies that generate lots of cash with management teams who use this cash wisely.
The adoption of the Japanese Stewardship Code by almost every major institutional investor is one reform measure the Jupiter Japan fund manager is particularly excited about. In a bid to promote sustainable corporate growth, institutional investors are now obliged to actively engage with the running of the company they invest in. Often accused of being too cosy and therefore complacent with company management, the new measures have been put in place to promote constructive challenge.
This has manifested itself in three ways; all of which are a fillip for Simon Somerville. Firstly, the market has witnessed an increase in dividend payments and share buybacks. Secondly, firms are beginning to value overseas investors, who have traditionally been ignored in favour of more-forgiving domestic shareholders. Thirdly, firms who cannot commit to either of these measures are being exposed as poorly managed.
Toshiba is one such company. The company generates very little cash flow, meaning its ability to return cash to shareholders is restricted. The focus on management, too, has exposed Toshiba's senior officials. The CEO and a host of other managers were forced to step down in the wake of a huge accounting scandal.
Nomura Co, on the other hand, is a firm Simon Somerville rates very highly. The company carries out design work for hotels and retail stores, with over 20% market share. Using this foothold, Nomura Co has been able to take advantage of tourism growth in Japan.
Currently, tourism only comprises 1% of Japan's GDP; however, it is growing at a rate of 40% annually. Factor in the potential revenues from the 2020 Tokyo Olympics, and the future for this industry looks bright. As such, Simon Somerville is looking to identify more opportunities in this space.
The past few years have not been easy for Simon Somerville. Low interest rates and quantitative easing have conspired against the fund manager's focus on businesses that generate lots of cash. Under these conditions, borrowing is easy and firms with big debts are treated kindly. Companies with low debt levels that generate lots of cash have not been in high demand, so Simon Somerville has had to stay patient during this period.
|Annual percentage growth|
| Sept 10 -
| Sept 11 -
| Sept 12 -
| Sept 13 -
| Sept 14 -
|Jupiter Japan Income||2.66%||-4.16%||20.11%||-0.92%||16.06%|
Past performance is not a guide to future returns. Source Lipper IM* to 01/09/2015.
However, Shinzo Abe's third arrow of structural change has shifted the focus from broad economic policies to concentrate on sustainable corporate growth. This is a great environment for the Jupiter Japan Income Fund to operate within. The past year has demonstrated this with an impressive return of 16.1%*, compared to 10.6% for the Topix. Please remember past performance does not serve as a guide to future performance.
This fund is on the Wealth 150 list of our favourite funds across the major sectors. While the fund has a bias towards companies paying high and rising dividends, it is does not focus purely on income, instead aiming to provide the best overall returns from a combination of income and growth. We believe it remains a good choice for exposure to Japan.