Kames Capital: Why Japan is the land of the rising income

The £434.7m* Kames Global Equity Income fund has moved to an overweight position in Japan as corporates in the country increasingly adopt shareholder friendly policies amid mounting overseas pressure to return cash to investors in a low growth, low inflation environment.
Mark Peden, lead manager of the fund, says foreign investor pressure, the government pension fund’s desire for yield, the new corporate governance code and fewer alternative uses for cash has meant better returns for shareholders in Japanese companies in the form of higher dividends and buy backs.
“In the mid-1990s shareholders were at the bottom of the corporate priority list in Japan,” he says. “Although the pace of change has been glacial, corporates have gradually become more shareholder friendly with improved investor relations, less irrational decision making and better returns for shareholders. The story is still in its infancy as the market yield is just 2.2% but the trend is clear, payouts are rising and companies have the firepower and willingness to increase dividends.”
Japanese balance sheets have improved over the last 15 years as companies have been increasing equity (+96%) and paying down debt (-20%), meaning Japan now has more companies with net cash than most other major markets.
Peden has allocated 10% of the Kames Global Equity Income portfolio to Japan, compared to around 8% for the benchmark, across a mix of domestic and export-orientated stocks. “This is a differentiating factor compared to our competition who have perhaps been slower to pick up on the trend,” he says. Key holdings include tyre manufacturer Bridgestone (3.6% yield), semiconductor equipment company Tokyo Electron (3.2%), engineering recruiter TechnoPro (2.9%) and construction company Daito Trust (3.0%).
“Bridgestone and Tokyo Electron are both global leaders in their field with attractive ROEs and net cash on their balance sheets”, says Peden. “Daito Trust is the leading manufacturer of condominiums in Japan while TechnoPro, an engineer recruitment company, is the smallest and least well known of our Japanese holdings but because of favourable legislative changes and a tight labour market they’re delivering double digit sales growth and have an ROE in excess of 30%.”
Peden points out that the Japanese stock market is also highly attractive relative to its fixed income market. In Japan 10-year JGBs have a negative yield and the Bank of Japan has a stated aim of keeping it close to zero. With the stock market yielding 2.2%, the stock market offers a 200-basis point-plus yield premium to JGBs. This compares to a 30-basis point premium in the US.^**
“Japan doesn’t embrace change quickly, but once it does it embraces it enthusiastically,” says Peden. “We believe yields will continue to rise and over time we expect other global income funds will also be looking to take advantage and increase their allocations.”