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Schroder Japan following Japan’s comeback trail

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Japan still is the world’s third-largest economy, after the USA and China, but for the last two decades the Land of the Rising Sun has been a byword for capitalist decline. 

Plagued with problems, Japan’s Nikkei 225 hit its highest point in 1989 just before the calendar turned to the 1990s, but since that time, the stock exchange been on a nosedive. That is until recently, and today the Nikkei is around the same level it was in December 1989.

But in the intervening years, Japan wrestled with massive youth unemployment, deflation, a decade-long cost of living crisis leading to a slump in domestic consumption and a ticking demographic timebomb with an aging population and low birth rate.

However, Japan is starting to turn its ship around. The reforms initiated under the late Japanese prime minister, Shinzo Abe, that aimed to stimulate growth through monetary easing, fiscal stimulus and structural reforms pushed Japan’s economy back into growth. Japan has also always been at the forefront of technological innovation both in consumer products and industrial machinery and it continues to innovate and produce some of the most advanced products on the market. Moreover, the Japanese economy is diverse and has some of the world’s leading brands and biggest companies which have shown resilience throughout the global economic downturns of the last 20 years.

A good way to gain access to the market is the Schroder Japan Trust [LON:SJG], which is in the Association of Investment Companies (AIC) Japan sector, a sector of five funds. The fund has been running since 1994 and managed by Masaki Taketsume since 2019. Schroder Japan is benchmarked against the Topix Total Return Japanese Yen index (GBP).

The fund has a Net Asset Value (as at 30th June) of GBP338.4m and has 62 holdings. The fund has an ongoing charge of 1.14% and aims to achieve capital growth from an actively managed portfolio principally comprising securities listed on the Japanese stock markets, with the aim of achieving growth in excess of the TSE First Section Total Return Index in sterling over the longer term.

Schroder Japan amends dividend and discount policy

Last month the trust announced an enhanced dividend and discount management policy as the board believes that in investing in Japan, dividends will play an increasingly important role in shareholder returns. Management noted that over the last few years Japanese corporations have been following a trend of improving corporate governance and shareholder value to make investors more ‘sticky’ and retain their shareholding for a longer time.

The Japan Trust has grown dividends by 12.7% on an average yearly basis for the last decade, but last month management decided to supercharge dividends, adopting an enhanced dividend policy to pay out 4% of average net asset value each financial year.

At the same time the trust rehashed its conditional tender offer mechanism. Following sustained outperformance from Taketsume, compounding at 4.67% a year to end-May 2024, the fund did not automatically trigger a tender offer due at the end of this month. The new mechanism proposes that if Taketsume does not deliver performance at least in line with the Tokyo Stock Price Index Total Return in sterling terms over a five-year period starting from 31st July 2024, then the board propose a tender offer of 25% of the issued share capital at a price equal to the prevailing net asset value less costs. The company also has been willing to initiate periodic share buybacks. The changes, Schroder hopes, will make the fund more attractive to new investors.

Schroder Japan’s bottom-up stock picking approach 

The fund is dominated by larger companies, at least in its top holdings, and Taketsume follows a bottom-up, stock-picking philosophy. The trust is a portfolio of the best ideas. The companies cover the complete spectrum of Japanese equities, across different sizes and sectors. But they have two common factors: firstly, they are well-managed, high-quality companies, and secondly, their current share prices do not yet reflect their potential.


Research on these companies by Schroders’ in-house research analysts gives Taketsume the conviction he needs to invest in just 60 to 70 stocks from among more than 3,000 available to the trust in the Japanese equity market.

The fund returned (on a share price total return basis) 18.9% over one year to 26th July against a sector average of 7.6%, the second-best fund in sector. Over five-years Schroders Japan was the top performer in sector, with a 52.9% return against a sector average of 18.6%. Schroder Japan also took the silver medal over 10-years with a 155.6% return against a sector average of 144.3%. The fund has a -8.12% discount to premium.

Top five holdings as at 30th June 2024

Investment Sector Weighting
Sumitomo Mitsui Financial [TYO:8316] Financial Services 5.8%
Hitachi [TYO:6501] General Industrials 5.8%
Toyota Motor Corp [TYO:7230] Consumer Discretionary 5.3%
Tokio Marine [TYO:8766] Financial Services 3.9%
ORIX [TYO:8954] Real Estate 3.4%

Source: Schroder Unit Trusts Ltd.

Schroder Japan Trust offers investors a way to tap into the potential of the Japanese market. While challenges remain, the fund’s strong performance record, coupled with its focus on high-quality companies and the manager’s stock-picking expertise, make it a compelling proposition for those seeking exposure to this dynamic market.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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