SCHRODER JAPAN TRUST: Fund betting that Japan will be the country with rising profits

No one can accuse the board overseeing London-listed investment fund Schröder Japan of complacency. Quite the contrary. Led with aplomb by chairman Philip Kay, it is determined to ensure the £304m fund remains a top choice for investors seeking exposure to the Japanese stock market.

Although top fund manager Masaki Taketsume is meeting targets in terms of investment returns, the trust is having difficulty attracting buyers for its shares, a problem that plagues most investment trusts. The result is a share price that unfortunately does not reflect the value of the trust’s assets. Over the past year, shares have traded at an average discount of 10%.

Rather than sit back and wait for things to change, Kay and his compatriots on the trust’s board have opted for a bold, double-edged approach.

Last month, the trust announced measures designed to make it more shareholder-friendly, in the hope of reducing the discount and increasing returns for investors.

First, it said it would strive to pay investors a higher dividend in the future – 4 percent annually, compared with the current 2 percent.

Although a large part of this “enhanced” income will be funded by dividends paid by the trust’s underlying holdings, some of it will be funded by its assets (in effect, a return of capital). The logic is that many patient investors like to be rewarded with a regular (annual in the case of Schröder Japan) income stream.

Secondly, it was stated that if the trust failed to outperform its benchmark (the Tokyo Equity Total Return Index) in sterling terms over the next five years, it would give shareholders a partial opt-out, allowing them to sell a quarter of their holdings at a price reflecting the value of the trust’s assets, not the shares (in other words, a better price).

Kay has described the moves as a “great package for all of our investors.” While they will put pressure on Taketsume to continue to outperform, he does not appear to be feeling the pressure. In an interview from Tokyo five days ago, the manager said his investment philosophy – based on buying undervalued companies – would not change.

“The trust’s performance has been solid since I took over about five years ago,” he said.

“We hope that these new measures will reduce the discount at which the shares are trading and, in turn, make the trust even more attractive.”

Taketsume’s investment track record is exemplary: five-year returns of 50%, compared with 28% for the fund’s peer group average. More importantly, he is convinced that he can continue.

“There is potential for a further rally in the stock market,” he said. “Inflation is returning to Japan and this is helping companies that have pricing power, especially those focused on the domestic economy. This, in turn, is boosting corporate profits.”

The 62-company portfolio has a bias toward companies focused on the domestic market. A good example is Fukushima Galilei, a manufacturer of energy-efficient refrigerators for the food and medical industries. The trust began investing in the company in late 2019 and it now accounts for 1.2 percent of the fund’s assets.

“Fukushima has a big advantage in the domestic market,” Taketsume said. “Although material and labor costs have increased, this has been passed on to customers and increased profits.”

The trust’s stock code is 0802284 and its symbol is SJG. The current annual fees are reasonable at 1.14 percent.