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James Carthew: new faces and a brighter future for Japan

James Carthew: new faces and a brighter future for Japan

Shinzo Abe, who has just become an internet meme by doing a backward roll into a golf bunker, while hanging out with Donald Trump, has pulled off what Theresa May couldn’t, calling a snap election and securing an increased majority.

Japan’s prime minister first secured the position in 2006 but it was his re-election on 16 December 2012 that ushered in the period of ‘Abenomics’ (a series of economic policies designed to revive Japan’s fortunes) and triggered the renaissance of Japan’s stock market.

A 118% return from the Topix index since then to the end of October has helped dim memories of Japan’s lost decades when the country became a byword for deflation and weak stock market performance with the Topix returning just 15% from 1 November 1997 to 16 December 2012.

The fund managers who navigated their way through the wilderness years in Japan deserve credit, especially those who made money for investors regardless. One of those is Sarah Whitely, manager of Baillie Gifford Japan (BGFD). She has announced she will retire next April. The baton will pass to Matthew Brett, who has worked with Whitley since 2003. He will be assisted by Praveen Kumar who manages the smaller company focused Baillie Gifford Shin Nippon (BGS) and who has been with Baillie Gifford since 2008.

To demonstrate the degree to which these funds have beaten local indices, since the 2012 election BGFD has returned 293% and BGS 321%. Through the period from 1 November 2017 to 16 December 2012, BGFD returned 109% and BGS 188%. This is a good illustration of the power of active investing relative to buying an index-tracker or an exchange-traded fund.

It would be fair to say that the Japanese economy isn’t exactly firing on all cylinders. Although it is true that Japan has experienced the second-longest recovery in its history with 58 consecutive months of GDP growth since the start of Abenomics, consumers have seen barely any growth in their disposable income. After years of targeting inflation, in the hope of kickstarting the economy, it remains anaemic at about 0.7% a year.

The government has done what it can to try to address the problem. Corporate governance reforms are removing some of the strangleholds on economic growth but Japan’s ageing population, and the march of technology act as a severe deflationary brake on the economy that is hard to shift. This is a factor in most Western economies as well and we must adapt to it.

Japanese companies have learned to live with the situation. On the negative side they did things like hoarding cash; why wouldn’t you when its real value was rising? However, some of the policies introduced by the government have sought to discourage this and this is being reflected in rising dividend pay-out ratios and share buy backs.

This has provided the sort of environment where CC Japan Income & Growth (CCJI) could be launched and provide investors with a modest yield that is not manufactured from capital. Remarkably, it has just pipped BGFD to the post in terms of producing the best net asset value (NAV) returns over the past year among the peer group of large company Japan investment trusts.

How can these managers deliver, consistently, benchmark-beating returns? They would say that the answer is simple, good stock selection. The managers will tell you that Japan is full of dynamic, innovative companies – you just have to find them.
It might be easy to become fixated with the macroeconomic picture. Regional politics, especially North Korea and the territorial disputes over the South China Sea, played a large part in Abe’s re-election and there are any number of other existential threats to rising stock markets.

However, the chairman’s statement from BGFD’s recent annual report contains a glowing report for the country: ‘The board visited Japan in May with the managers, meeting CEOs and senior management of many current and potential investments. We returned home with an even more positive outlook for your trust given the impressive entrepreneurial spirit we found that many fail to give Japan credit for, a real commitment to the social fabric of the country through profitable progress and investment, allied to new technologies that will blossom in this evolving technological age.’

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.


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