An update from manager Hisashi Arakawa
In this podcast we are joined by Hisashi Arakawa, manager of Aberdeen Japan Investment Trust. He discusses the latest annual results for the Trust, recent portfolio activity and the outlook for the Japanese market.
Recorded on 5 July 2021.
Discrete performance (%)
|Benchmark (Topix Index)||10.7||6.1||(2.1)||9.5||24.2|
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar.
Past performance is not a guide to future results.
Annual dividend per share (p) for financial years ending 31 March
|Dividend per share (p)||15.00||15.00||5.40||5.20||6.00|
Cherry Reynard: Hello and welcome to this abrdn Investment Trusts podcast. I'm Cherry Reynard. With me today is Hisashi Arakawa, our manager on the Aberdeen Japan Investment Trust. We'll be discussing the latest results for the trust and recent activity and the outlook for the Japanese market - hi Hisashi. Can we start with an overview of the Trust, you know, its aims its investment approach, and also a little bit on what differentiates it from its peer group.
Hisashi Arakawa: Hi Cherry, good morning. Yes, Aberdeen Japan Investment Trust, invests in quality businesses, businesses, that strong moat competitive advantage, and those direct run by management teams with a proven track record. And we read that this makes a difference over time, because these quality businesses are resilient, they are consistently generating superior returns. And we saw this very clearly last year during the pandemic, these quality businesses were able to cut costs in difficult times quickly, or capture new opportunities arising from the pandemic.
Another aspect of our investment approach is that ESG is well integrated into the process because we needed environmental, social and governance factors, financial material, and they impact corporate performance over the long term.
But not all companies are perfect. And we believe that it's important to engage with these companies, if there is room to improve. And we are quite active on this front, because we are long term investors, and we can establish this relationship with management teams to have a constructive discussion.
The other aspect of our team is that, in addition to locally based team on ground, we can visit management teams or look at products that are being offered, or what's happening around Japan, on the ground. But also, we have 140 investment managers around the world, and we access these global, which means is that we have a good feel for what's happening in the supply chains globally. Because many Japanese companies, especially the quality companies, are global. And we need to understand in a timely manner, what's going on around the world. And this helps us make better investment decisions.
I'd also mention that, because it's an all-cap mandate, we can invest in a wide range of companies from large to small and really look for the best opportunities within the Japanese market.
And finally, we have an enhanced dividend policy in place. For the financial year ended March 2021, the total dividend was 15p, which is equivalent to just over 2% dividend yield. We believe that we offer a good balance of capital gains, as well as income gains for investors.
Cherry: You've just released the latest set of results. I wonder if you could talk a bit about the highlights from that, you know the performance dividends any ESG highlights?
Hisashi: Sure, the Japan Investment Trust has consistently outperformed the index topics since the mandate was changed to Japan early in 2013. Before the financial year ended March 2021, the Trust share price rose 35% in Sterling against index that was 25%. And if you look at that one year, the performance is really driven by these high-quality businesses such as Shin-Etsu Chemical, they are the number one maker of semiconductor wafers, as well as PVC materials used in buildings Daikin Industries, which is the number one aircon maker in the world, and also now Tesco, they global leader in components using robotics. So, these quality businesses continue to provide and contribute to our performance for the Trust. In terms of dividend for the financial year ended, the total dividend was 15p so that equates to just over 2% yield and this is in line with enhanced dividend policy that was introduced earlier. We also have share buyback programme in place. We believe that the Trust offers good combination of capital gains as well as income gains.
Cherry: Okay, great. Could you talk about any recent changes to the, to the portfolio, you know, any major adjustments you've made over the past year or so?
Hisashi: Yes, because as it is an all-cap mandate, we're able to invest in some of the global heavyweights such as Toyota Motor, but also some of the younger companies - fast growing companies in small cap space - including IPOs. So we subscribed to IPO of WealthNavi, that was the end of last year. And they are the first and largest logo advisor in Japan. And they contributed to performance this year, and they continue to grow the client base. As you can imagine, in the low interest rate environment, especially in Japan, retail investors are looking for opportunities, looking to make their money work, and WealthNavi has been able to capture that demand. Another example is Tokyo electron that we initiated earlier this year. They are one of the leading semiconductor manufacturing equipment makers in the world. And because of their technological edge, they are able to capture the rising demand for semiconductors for valuation applications from 5G to data centres. And the stock continues to do well after initiation. We've initiated these holdings by taking profits from some of the stocks that did well last year, and we've been recycling capital in doing so.
Cherry: Okay, and it's been a slightly tougher time for performance recently. I want to - can you explain why that happened?
Hisashi: Yes. Last year, we had strong performance - out performance - of the Trust. And coming to this year, we saw the market look at reopening economies around the world, including Japan, and taking profits from stocks that did well last year. So, some of these resilient businesses that did well last year, they were subject to profit taking this year. And instead, some of the beneficiaries of reopening, such as banks, trading companies, still, they have been doing well this year.
But we believe that some of these businesses face structural challenges over long term, and some of the rotation is done in our view. And as a result, the market has been stabilising after the sharp rotation earlier this year. So, we believe that this is actually an opportunity. If you look at the single stock or stock specific basis, there are some opportunities arising as a result of this rotation that we've seen.
Cherry: Now, I wonder if we can turn to engagement, you mentioned that that's an important part of your process a little earlier on. I wonder if you could show how that works in practice, you know, give an example where engagement has been successful.
Hisashi: Yes, as mentioned earlier, we are very much active in engagement, because not all companies are perfect. And in fact, there's still room to improve for many Japanese corporates - whether on the E,S or G front - particularly on the G front. And we believe that that way, we can unlock value hidden in some of these holdings. And to give an example, SANKEN ELECTRIC is long-term holding first, it's a semiconductor company. And they had this subsidiary based in US that was highly valued, but the market was just not evaluating or rewarding a company for it.
What we saw last year was that the company based in US – the subsidy based in US - was listed, and this helped them unlock value. And as a result, the stock is more than doubled within a short period of time. They’re also restructuring their businesses to focus on areas of growth. And this follows many years of engagement from us with the company, discussions the company, to unlock value and improve corporate value. So, this has been a positive contributor to our performance.
Cherry: Okay, great, thank you. And what about markets more generally? I mean, what are you seeing on the ground in Japan today? How Is recovery progressing sort of post pandemic?
Hisashi: Yes. What we saw earlier this year was recovery of exports to markets around the world. Japan's exports continued to be at the historical high levels. But at home in Japan, the economic outlook continued to be uncertain. And this is on the back of continued cases of COVID 19 infections and also slow progress of vaccines, which led to concerns over consumption and domestic economy.
But what we see right now is the government has been active in accelerating vaccination. And towards the end of last month, more than 10% of population had already received two doses of vaccines. So, we believe that this is actually an opportunity because we see gradual improvement in the outlook for the domestic economy as well. Once the vaccination exceeds a certain rate, then some of the consumption or some of the sectors that have been hit by the current pandemic could begin to see recovery. So, we are cautiously optimistic on that front.
Cherry: Okay, and what about corporate earnings? Have you seen an improvement there, or is that sort of waiting for economic recovery?
Hisashi: Yes, for companies that are more exposed to global markets, we have seen a sharp recovering in earnings. And while for those that have high exposure in Japan, management teams remained cautious. But we see or we feel from speaking to these companies, the outlook is improving slowly but surely. And this actually gives a positive outlook for corporate earnings as well.
Cherry: Can you discuss any sort of major themes running through the portfolio today?
But I’d just like to mention going green because this is increasingly important trend that we see. Governments around the world are taking measures to address growing environmental challenges, and Japan actually has a lot of companies that are able to provide energy efficient energy saving solutions. And in the Trust, we hold the SANKEN ELECTRIC - that I mentioned earlier - they make energy saving chips for white goods, Murata that makes key components for electric vehicles, and also KOITO, they make energy saving headlamps. So, Japanese companies are actually well positioned - not just in terms of being energy efficient themselves - but actually using their products and services to help save energy, so we believe that there is actually an opportunity for many of the companies held in the Trust.
Cherry: Thank you, I was just going to finish off by asking - why now might be an interesting time to think about investing in in Japan. And perhaps this just in particular?
Hisashi: What we saw earlier this year was export read recovery. But now we are seeing signs of domestic led recovery as well. So, we have, we have - once these recoveries begin to be seen more clearly, then the market could appreciate the improving outlook for these corporates. Japanese stocks have been somewhat weak in more recent times due to concerns of slow progress and vaccination, but we see on the ground that vaccination is making good progress and could be that this is actually an attractive time to invest in Japanese equities for that reason.
As for the Trust, we hold a number of companies that can benefit from reopening economies. Just to give you some examples, companies such as Keyence that are beneficiary of improving sentiment for capital expenditures, that had been weak for a while; Recruit that will benefit from rising job ads and pickup in promotional material related to travel and activities and also a company such as Asahi group, beverage company, that is expected to recover from lifting of restrictions for daily activities. So, we believe that the Trust is well positioned for recovery ahead, both globally and in Japan.
In addition, the Trust trades at a discount against NAV, it trades at a wider discount to its peers. And we read that this could provide an attractive entry point for investors, given the improving outlook. Thank you.
Cherry: Great, okay, thank you, Hisashi for your time and those insights today. Listeners can find out more about the trust at www.Aberdeenjapan.co.uk or by contacting one of the sales team. And thank you so much for tuning in.
A short update on Japan
In this podcast we are joined by Ben Morris, Senior Investment Specialist at abrdn. Here he provides a short update on Japan: an update on markets and why Japan still remains an important asset class, a look at how we invest in Japan and finally a brief outlook.
Recorded on Monday 26th October 2020.
Hello, my name is Ben Morris and I'm the Senior Equity Investment Specialist at abrdn and I'm delighted to share a short update on Japan. I'd like to cover three areas. Firstly an update on the market and why Japan still remains an important asset class. Secondly, how we invest at abrdn. And thirdly, and finally, a brief outlook.
So in terms of an update on the market, we've seen Japanese equities advance in the third quarter of this year on expectations of policy continuity after Yoshihide Suga succeeded Shinzo Abe as Prime Minister. In addition to maintaining fiscal and monetary stimulus Suga pledged to speed up structural reforms, promote digitalisation in the government and society as a whole. He has also aimed to consolidate small and medium sized enterprises and regional banking sectors to help optimise their operations. Similarly, he has pledged to promote more competition among mobile phone carriers to drive down prices and sentiment has generally lifted as regional authorities including the Tokyo Metropolitan Government that downgraded their COVID-19 alert levels as a result of the receding infection rate. And in addition, there was some general optimism that the US Federal Reserve's revamped approach to handling inflation would keep interest rates low, lower for an extended period of time. So with these sort of thoughts on the market in mind, it is worth reminding ourselves of the opportunity in Japanese equities. As you know, Japan is one of the largest single country markets in the world, around 7 or 8 per cent of MSCI world. With a similar number of companies as the US, we know that coverage is poor. It's probably the most under covered developed market in the world. And this really means that there are genuine opportunities for active managers. Secondly, investing in Japan is not only about investing in Japan, there are many high quality companies that are operating across the world, that just happen to be based in Japan. A key example of this would be Makita, the power tool manufacturer or Seismic, the medical equipment manufacturer. And thirdly, ESG. Historically, governance has been poor. We have seen numerous issues in the past around the likes of poisoned pills, weak controls, inefficient capital allocation. So really this is coming from a low base and the manager is looking at these characteristics and engaging with companies certainly provides an opportunity there.
So onto the second question, why Aberdeen Standard Investments and what's our approach. Our long term quality approach really is driven by fundamental in depth bottom up research with the ESG analysis fully embedded within that and we're seeking to uncover high quality Japanese companies that we can invest into for the long term. The team, on average, meets with about 150 Japanese corporates a year. And we do certainly benefit from our large experienced investment team across Asia. And actually the wider global equity research platform that we have, that we benefit from, helps us both in terms of coverage, but also cross checking investment opportunities. And being a long term, shareholder - long term investor - certainly does help the company engagement. And as we know, that engagement aspect really is supportive to managing those potential sort of governance risks. The outcome of this approach enables the team to construct portfolios, where you know, if you think about portfolio metrics, they are typically above average on a number of areas. Firstly, profitability. Our focus on expanding on strong economic notes and premium and high profit, operating profit margins than the broader index stands the portfolios in good stead. Secondly, dividend growth, looking for rising powers of growth and those that are growing faster than the index, strength of balance sheets and having strong balance sheets, low levels of net debt to equity and in many cases net cash, hugely supportive and offers up those high quality characteristics that you might expect. And thirdly, returns - having higher return on equity than the index. So, growth from these companies that we are investing in. And from these underlying companies that we've identified and invested into, we’re able to draw out several themes from that. So things like automation, smart initiatives, structural reform opportunities and technological and pharmaceutical innovation, would be some attractive areas that we’ve seen that are finding and have found companies that we invest in. These opportunities combined with attractive valuations for Japanese equities certainly give us a reason to consider an allocation.
And then finally, on to a brief outlook. Essentially, the medium term outlook is relatively hazy. We're seeing a fresh wave of coronavirus cases throughout the world. And this could certainly stifle the start of a recovery. We have seen some promise in terms of vaccines and definitely things like the timeline and the success of these treatments are still pretty unclear. And then we add on to that the uncertainty and the tensions a break between Washington and Beijing - finalising in the context of the US presidential election in early November. Certainly there are challenges, but we do believe that the solid fundamentals of the companies that we invest in to, combined with management agility should allow the recovery of these companies to occur faster than the broader market. And we may remain absolutely committed to our bottom up investment approach. And we have an emphasis, as we've discussed, on good quality companies at attractive valuations while actively engaging with their management to ensure robust levels of corporate governance and high standards of sustainability. Our holdings retain healthy balance sheets and generate strong cash flow. And it's you know - the management experience and the knowledge that we have of our company management who've been able to successfully navigate previous crises that give us more confidence in the valuable addition they can add to the portfolios. Thank you very much for your time today. And look forward to speaking with you again soon.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up, and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.