27
DIY Investor Magazine
/
September 2016
CORPORATE EFFICIENCY
While the recent pick-up in dividend growth in Japan
is encouraging, comparisons with other developed
markets can be revealing. Return on equity (RoE), for
example, which measures how efficient businesses
are at generating earnings from shareholders’ capital
has been frustratingly low. In 2015, for instance, RoE
in Japan was 8.7%, according to Citi Research, well
below the US (16.4%), UK (13.2%), Australia (12.3%)
and Europe ex-UK (11.4%).
Japan also has a history of cross-shareholdings
(interlocking share ownership) between Japanese
companies dating back to just after World War II, with
banks among the biggest shareholders. The Tokyo
Stock Exchange defines cross-shareholdings as ‘listed
companies holding the shares of other listed companies
for reasons other than pure investment purposes, for
example, to strengthen business relationships’. Cross-
ownership has led to the creation of conglomerate-style
corporations where core businesses are often diluted.
It has also led to interdependence of share prices that
might otherwise have been uncorrelated.
Shareholder value could clearly be created through
corporate efficiencies. One means of doing this could
be through improved company board independence. At
present, Japanese firms typically have less than 10% of
their boards made up of outside independent directors
according to ISS/Macquarie research. In contrast, US,
German, Swiss and Australian companies, for example,
typically have 50% or more independent board
members.
In addition, many Japanese companies have had fixed
dividend payout ratios based on a fixed percentage
of their earnings. This has led to volatility in dividend
payments as earnings have fluctuated.
Despite these issues, overseas share ownership of
Japanese companies has increased in recent years
from 4% in 1987 to around 31% in 2015 according to
Bank of Japan / Macquarie Research.
IMPROVED GOVERNANCE
In June 2015 ‘Japan’s Corporate Governance Code’
was introduced as part of Prime Minister Shinzo Abe’s
‘third arrow’ in an attempt to boost the economy and
drive shareholder-friendly corporate governance reform.
One of the code’s main objectives is to promote
transparent, fair, timely and effective decision-making
by Japanese businesses. Companies are encouraged
to appoint at least two independent directors, disclose
cross-shareholdings and examine the rationale for
major cross-ownership on an annual basis.
STRATEGY POSITIONING
We are seeing some more opportunities for Japan,
with companies announcing better dividend payments.
Having said that, the market only yields around 2% at
present, and with only 10.7% of the Japanese market
expected to yield more than 3% looking ahead 12
months, it is proving challenging to find companies with
an attractive dividend yield2. At present, Henderson
International Income Trust only has limited exposure to
Japan but as the reforms take hold and the dividend
culture becomes more embedded we would expect
to see more opportunities to invest in Japanese
companies that meet our investment criteria.
2Source: Thomson Reuters Datastream, MSCI Japan Index, at 30 June 2016.
Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.
The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any
contract for the sale or purchase of any investment.
Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund
Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital
Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and
Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.
