1. Why would you describe this strategy as a fund to watch?
After the boom years of the ‘80s, the Japanese market went through a prolonged period of under-performance and investors were right to be underweight. However, since 2012, the market has been on an upward trajectory. As result of the governance revolution and the new stewardship code (2012), and with the support of the Tokyo Stock Exchange, the landscape is now changing.
The Zennor Japan Equity Income strategy seeks to benefit from the corporate governance revolution and transformational structural reforms currently taking place in Japan. By investing in companies listed, domiciled and operating in Japan, the fund offers the potential for a diversifying dividend income stream, together with the opportunity for long-term capital growth. Additionally, for investors who also want to promote positive change, through their stewardship and engagement activities the portfolio managers actively encourage and support the changes that help many firms improve business performance and shareholder value.
2. Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Launched in April 2023 by two Japan specialists, Zennor Japan Equity Income takes advantage of several ‘unique-to-Japan’ factors, including undervalued companies, limited fundamental market research coverage and importantly, the corporate governance revolution currently underway.
Applying a simple philosophy, the managers look for companies whose share price is trading below intrinsic value, with a stable and growing income stream – and a material upside potential.
Combining the best of traditional value and growth investing, and integrating material ESG factors, the managers identify three types of dividend paying companies; (i) where dividends can grow more strongly than the earnings by increasing the pay-out ratio or buying back shares, (ii) where earnings are growing and dividends will rise along with earnings, and (iii) where the dividend is well protected and offers an attractive yield at the current level. The fund invests across the market capitalisation spectrum and aims to deliver sustainable income, combined with the opportunity for long-term capital appreciation.
In a market like Japan, experience is everything. Zennor Japan Equity Income is managed by a seasoned team of stock pickers who combine their complementary backgrounds, and their in-depth knowledge and market experience in pursuit of larger potential returns.
3. What is your outlook for the fund and how are you positioning your portfolio as we move into 2024?
The fund is naturally positioned in very strong balance sheet companies with undemanding valuations. Our current posture is quite domestic, with only limited exposure to automotive and technology areas – given the volatility in some of these end markets. We are confident that the TSEs kaizen style reform will continue to push companies to think harder about cost and quantity of capital used in their business, as well as what any appropriate follow up steps should be. Zennor firmly believes that many companies will be compelled to increase distributions to prevent the build-up of excess capital; this bodes well for dividend investors and for share buybacks.
4. Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
We are somewhat cautious about the global backdrop and are especially focused on opportunities that are specific to Japan. The primary emphasis is on what we call the revolution in corporate governance and seeking to identify companies where there could be an improvement in capital allocation strategy. We also find specific tailwinds for our investments, such as the TSMC investment in Kysuhu, which will provide a strong investment environment for holdings including Kyudenko. A further underlying theme is the parent-listed subsidiary unwind. Often these ‘child’ companies trade at material discounts, and the Tokyo Stock Exchange has put strong pressure on parents to resolve the conflicted governance of these structures. We have firms such as Nohmi Bosai, Canon Marketing and ShinEtsu Polymer, amongst others, that whilst having their own standalone investment merits, may also have an event catalyst from this capital structure change. Finally the burden from cost of capital considerations is placing greater pressure on conglomerates to clarify their core corporate activities and to divest non-core activities. Holdings such as Panasonic, Nisshimbo, Secom and Kyocera could all see meaningful change in their business structure as they address underperforming non-core, legacy assets.
