Japan finally emerged from a decade of political paralysis following Shinzo Abe's election as Prime Minister at the end of 2012. His 'Abenomics' programme of stimulus and reform was well-received by investors, leading to phenomenal returns from Japan's stock markets in 2013. In the first few months of 2014, the excitement faded and stock market performance proved lacklustre.
More recently, Japan entered recession following two consecutive quarters of negative economic growth. That said, Shinzo Abe appears determined to keep investors' interest in Japan and its stock market buoyant. The Bank of Japan recently announced it would expand its quantitative easing programme, which is hoped to result in higher share prices. Japan's national pension fund also announced it will increase its allocation to domestic shares, implying significant inflows into Japanese stocks over the coming years.
In particular, the government is seeking to support companies that can demonstrate attention to shareholder returns. For instance, the JPX Nikkei 400 Index launched last year, which comprises Japan's most capital-efficient businesses. In order to become index constituents, some companies are increasingly focused on generating high returns on equity (a measure of a firm's profitability) and increasing the amount of money returned to shareholders in the form of dividends and share buybacks.
This could be good news for the Jupiter Japan Income Fund, as this is exactly the type of company Simon Somerville, the fund's manager, seeks. He focuses on a company's ability to generate cash. He looks for management teams with a strong track record of reinvesting cash wisely to grow the business, or paying it out to shareholders as dividends.
While this strategy has proven a success over the longer term, 2013 was a relatively poor year for the fund compared with its peers and the wider stock market. High-quality, cash flow-driven businesses, to which the fund is biased, tend to lag a rallying market, as we saw last year. The market's shift towards lower-quality, more economically-sensitive areas proved difficult for the fund.
Simon Somerville is currently focused on areas he expects to benefit from pro-growth, pro-inflation policies implemented by the government. The fund is tilted towards more domestically-focused areas, with a bias towards the financials and industrials sectors. In the latter, new positions this year include automobile firm, Hino Motors.
Exposure to the healthcare sector has also recently increased, which could benefit from Shinzo Abe's desire to see bigger and better hospitals throughout Japan. Healthcare equipment supplier Ship Healthcare and drug manufacturer Sawai Pharmaceutical have been added to the portfolio this year.
The fund operates a concentrated portfolio which allows each holding to contribute significantly towards performance but this does increase risk.
Our view on this fund
Simon Somerville has built a good long-term track record since he began managing Japanese equities almost twenty years ago. He has managed the Jupiter Japan Income Fund since its launch in September 2005, over which time it has returned 42.4% compared with 25.0% for the average fund in the peer group and 36.1%* for the benchmark index. Please remember this does not serve as a guide to future performance.
|Annual percentage growth|
| Dec 09 -
| Dec 10 -
| Dec 11 -
| Dec 12 -
| Dec 13 -
|Jupiter Japan Income||14.1%||-5.7%||-0.2%||22.5%||1.3%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/12/2014
The past couple of years have been difficult for the fund. That said, we continue to like the manager's focus on quality, cash-generative businesses, with good management at the helm. In our view, this strategy could drive good returns over the long term. While the fund has a bias towards companies paying dividends, it is not strictly an income fund. The manager also focuses on businesses with good cash flows and the potential to grow its dividends. This fund is on the Wealth 150 list of our favourite funds across the major sectors.
Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.