Yet again, Japan has been left behind. The US has returned nearly 20% this year and Europe 16%. Japan has returned 7%. There are two possible explanations: the "secular stagnation" of Japan and the lack of interest from professional equity investors.
Economic growth of below 1% limits the potential for domestic companies, although there are plenty of opportunities overseas. There is nothing novel about Japan's slow growth. It is the result of a falling population; output per capita is as robust as anywhere in the developed world.
Japan: a 20% discount to America
Analysis by Thompson Reuters at the end of March estimated the Japanese market to be trading on 13.5 times 2019 earnings, slightly higher than Europe, the UK and emerging markets, but 20% less than the US. It also anticipated a 2.7% drop in corporate earnings this year and growth of only 3.7% next, though both figures look too pessimistic. Of course, market averages can hide a multitude of traps and opportunities. Simon Edelsten, co-manager of Mid Wynd International Investment Trust, enthuses about NTT, Japan's telecom giant. Revenues haven't grown for 25 years, but earnings per share have doubled in five years, thanks to efficiency improvements and share buybacks. The shares still only trade at the book value of the assets. Joe Bauernfreund, manager of AVI Global Trust (AGT, formerly British Empire) is focusing on the outstanding value in smaller firms. Japan now accounts for 21% of AGT's portfolio and £100m has been raised for a new trust, AVI Japan Opportunity Trust (LSE: AJOT), to invest alongside. "People say that nothing ever changes in Japan," he says, "as a result of which there are overlooked, neglected and mispriced assets."
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The median market capitalisation is £400m, so these are not tiddlers, yet 90% of them are covered by two or fewer analysts, so they go unnoticed. Why invest now? "The combination of extraordinary undervaluation, corporate governance reform... and growing shareholder activism." Historically, accountability to shareholders was poor and companies protected each other through cross-holdings. Only 5% of companies have a majority of independent directors. Poor share-price performance was the result.
The key to change, Bauernfreund says, is sympathetic rather than aggressive engagement with companies. The strategy is already working with a two year return of 15.8% in AGT from Japan against a Topix index return of 2.1%, while AJOT has returned 5.1% in seven months when the Topix index is down 1.3%.
The other explanation for Japan's lacklustre recent performance is that many investors regard the country, with its impossible script and idiosyncratic customs, as too troublesome and expensive to bother with. Until, that is, renewed outperformance makes fools of them. Bauernfreund's enthusiasm suggests that may be in sight
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Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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