Ian Cowie: new highs may be just the start for this comeback king

Japanese shares are hitting new all-time highs, several decades after their previous peak in 1989, boosted by rising exports and efforts to return value to investors. Now the top-performing investment trust in this sector over the last five years aims to add twice as much income to capital growth by doubling its dividend yield to 4% of net asset value (NAV).

Sounds too good to be true? Far from it, says the fund manager, who claims the price of a higher income today will not be low - or no - capital gains tomorrow.

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Schroder Japan Trust (LSE:SJG) has demonstrated the ability to deliver both income and growth with total returns of 22%, 56% and 160% over the past one-year, five-year and 10-year periods. Also, dividend income has risen by an average of 6.2% per annum over the past five years to give a current dividend yield of 2%.

What’s under the bonnet? Underlying assets are led by the industrial conglomerate Sumitomo; followed by the world's biggest car-maker Toyota (NYSE:TM); and the brewer Asahi.

The latter brews all Fuller Smith & Turner Class A (LSE:FSTA)’s excellent beers, including London Pride, as well as the foreign lagers Pilsner Urquell, Peroni Nastro Azzurra and Grolsch. Not many people know that!

Never mind the present or the past, what about the future? The fund manager argues that after 35 years of waiting for Japanese blue-chips to perform, the fun has just begun.

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Masaki Taketsume tells me: “Consider the return of inflation after three decades of low inflation and deflation.

“The current mild inflation in Japan encourages companies to invest for the future and stimulates consumer spending. This shift from deflation to inflation suggests that Japan may be entering a sustained period of higher investment, wage growth, and consumer spending.”

Structural reforms might support these trends. For example, Taketsume said: “One important factor is the campaign launched by the Tokyo Stock Exchange (TSE) last year, encouraging companies to focus on achieving sustainable growth and raising corporate value.

“This initiative prompted companies to increase investment in research, new equipment and facilities. While these measures may take time to yield results, they are expected to lead to sustainable growth and create more valuable companies.”

Sad to say, we have heard such talk before. But Taketsume is bold enough to claim it will be different this time and argues that bigger dividends give good reason to be cheerful. He explained: “Higher payouts make companies more attractive to income-focused investors.

“The percentage of Japanese companies that are ‘net cash’ - that is, whose cash on the balance sheet is greater than their liabilities - is 44%, which is much higher than in North America and Europe. That gives those companies scope to invest in their business, or increase returns to shareholders, or both.”

If he is right, these factors should also help CC Japan Income & Growth (LSE:CCJI), which leads this sector over the last year, while JPMorgan Japanese (LSE:JFJ) retains pole position over the last decade. They yield 2.7% and 1.2% respectively, rising by 7.2% per annum and 5.4%.

CCJI delivered total returns of 24% and 51% over the past year and five years but won’t have a decade-long track record before December next year. Meanwhile, JMJ can point to returns of 18%, 31% and 177% over the usual three periods.

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If only my long-suffering Japanese smaller companies specialist Baillie Gifford Shin Nippon (LSE:BGS) would show some similar signs of life. Please don’t laugh but this former high-flyer has fallen from favour and remains rooted to the bottom of its sector over all three standard periods with negative returns of minus 17% and minus 40% after a positive 78% over the decade.

To be candid, I am tempted by the Tokyo recovery story but sustained losses at BGS over several years make me hesitate. There is also the practical problem of identifying which shares in the forever fund I might turn into cash to pay for a new holding - but that’s the difference between fantasy fund management and real-life investment.

Demographics are another worry; more nappies are sold to Japanese pensioners than babies. Without wishing to sound harsh, a business trip to Tokyo 10 years ago made the Isle of Wight seem like a kindergarten.

No wonder City cynics fear another false dawn in the Land of the Rising Sun. But fortune might yet favour the brave. 

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS) and Fuller Smith & Turner (FSTA).