Investing in companies that are part of the new digitalised world has proved a sound strategy for many investors in recent years – as well as in the past few months as the world has gone into lockdown and is only now slowly emerging from its mothballing.
Look at the US stock market and it is the technology giants that continue to drive it forward – the likes of Apple, Alphabet (owner of Google), Amazon, Facebook and Microsoft. It is difficult to see how their dominance of both the stock market and world economy is going to recede, though for sure there will be hiccups along the way.
Yet the digital story is not exclusively an American one. Companies across the world are emerging that make possible the new digitalised age we all live in – where payments are made by phone rather than in cash, shopping is done online rather than on the high street, and where an array of services (everything from medical advice to buying a home) embraces new technology.
Traditional: Experts say there is big money to be made in Japanese firms that embrace the digital age, given 80 per cent of payments are still made in cash
One stock market where a raft of technology-focused companies is beginning to emerge – and excite some of the UK’s investment houses – is Japan. According to experts, Japanese technology companies provide UK investors with the opportunity to make solid returns over the next five to ten years because Japan is way behind the US in digitalising its economy.
So innovative businesses, developing industry-leading technologies, could grow rapidly as the economy modernises.
Nicholas Weindling manages the £1billion investment trust JPMorgan Japanese from offices in Tokyo. His investment record is exemplary, delivering returns for shareholders of just under 100 per cent over the past five years.
However, his fund and record have not registered on the radar of most UK investors. He believes this is because Japan is seen from the outside as a country with an ageing and shrinking population – and where economic growth is being held back by a culture of thrift rather than spending.
It is therefore not considered a ‘sexy’ investment, when in fact some companies that make up parts of the stock market are appealing.
‘If you look at Japan’s stock market, it is dominated by banks, car makers and office equipment manufacturers: the likes of Canon, Sony and Panasonic,’ says Weindling.
‘They are all operating in what I consider to be old-style industries. But as an investor, that is not where you are going to make your money. The key is to find the next generation of company ideas – and that usually means concentrating on companies with a digital bent.’
Among JPMorgan Japanese’s 60 holdings is the electronic payments company GMO Payment Gateway.
‘Its growth runway is long,’ says Weindling. ‘It’s at the equivalent of metre ten in a hundred-metre race, which means the opportunity for investors to make money as the business grows is huge.
‘Eighty per cent of payments in Japan are still made in cash.’
Other key stakes are in robotics specialist Keyence and Base, Japan’s answer to the music streaming company Spotify.
‘Japan leads the world in robotics,’ says Weindling. ‘Automation of production is a theme that is not going to go away. As for Base, subscription numbers have soared during the coronavirus pandemic.’ Weindling’s view is not an isolated one. It is shared by Praveen Kumar, manager of investment trust Baillie Gifford Shin Nippon, which invests in smaller Japanese firms.
‘There are more than 4,000 stock market listed companies in Japan,’ he says. ‘There’s lots of rubbish out there, but there is also a number of fast-growing disruptive businesses that are exciting from an investment point of view – but overlooked by overseas investors.
‘They’re the growth companies I’m interested in.’
The trust’s biggest stake is in legal information website Bengo4. com. Other top ten holdings include GMO Payment Gateway and Monotaro, an online retailer of factory clothes and industrial products. The trust has no holdings in oil and gas companies, banks or insurers.
‘There is underlying change going on in Japan,’ says Kumar. ‘This is providing investment growth opportunities as young, dynamic companies emerge to take advantage of the situation.’
Investment advisers are also keen on Japan as a stock market to make money from. Teodor Dilov is a fund analyst at the wealth manager Interactive Investor. He says that the Japanese stock market is in better shape than it has been for a long time – buoyed by a stronger economy (not affected as badly as others by the coronavirus pandemic) and reforms spearheaded by prime minister Shinzo Abe to make companies more shareholder-friendly.
These include better corporate governance and a greater emphasis on dividend payouts. But, like Weindling and Kumar, Dilov is most excited by the Japanese digitalisation theme. =
He says: ‘Japan has quickly become a market that investors cannot afford to ignore because of the advent of companies that are well positioned to profit from the digitalisation of Japanese society.
‘Large parts of Japan’s society are behind the digital curve compared with the rest of the developed world. That means exciting growth opportunities for Japanese companies involved in digital transformation.’
One other attraction of investing in Japan is that many of the smaller listed companies – including many digitally focused companies – are woefully under-researched. This provides smart fund managers, such as Weindling and Kumar, with the chance to unearth investment gems early – and before others. It explains why Weindling is based in Tokyo with the rest of JP Morgan’s Japanese investment team.
Brian Dennehy is managing director of investment research firm FundExpert. He has long recommended Japanese smaller company funds to clients and says the investment case remains robust.
‘Smaller firms in Japan represent good value and are under-researched,’ he says. ‘Three-quarters of the 1,900 listed smaller firms in Japan are either covered by just one investment analyst or none at all. By comparison, 70 per cent of US smaller companies are tracked by at least three analysts. For an active Japanese fund manager prepared to do some digging, investment opportunities abound.’
Dennehy believes that as Abe pushes through more economic and corporate reforms, the case for investing in Japan will become stronger. He also likes the fact that Japan is ‘politically stable with great social cohesion’, asking: ‘Is that unique in today’s world?’
Which investment trust is the best way in?
Both investment trusts JPMorgan Japanese and Baillie Gifford Shin Nippon are seen by investment experts as good ways into the Japanese stock market.
David Coombs is head of multiasset investments at asset manager Rathbones. He uses JPMorgan Japanese to get exposure to the Japanese stock market for the various multi-asset portfolios he runs on behalf of investors.
‘Japan is a stock market where good active fund managers can thrive,’ he says. ‘JPMorgan’s Nicholas Weindling concentrates on identifying out and out growth companies and it’s a strategy that has proved increasingly successful.’
Interactive Investor’s Teodor Dilov is a fan of Baillie Gifford Shin Nippon, describing it as ‘adventurous’. He adds: ‘The manager focuses on a concentrated number of exciting, emerging and disruptive growth companies – typically run by young, dynamic entrepreneurs.’
Baillie Gifford’s expertise in Japan is reflected by the fact that a number of its other Japanese funds are liked by experts. They include Japanese Smaller Companies – run by the same manager (Praveen Kumar) that oversees Shin Nippon – and Japanese, which has a focus on companies that are global leaders (the likes of games company Nintendo). Other recommendations include Lindsell Train Japanese and AXA Framlington Japan.
Japan is also an option for income seekers, although dividend yields are low at around 2.5 per cent. But coronavirus has not been as disruptive from a business point of view as elsewhere in the world – and Japanese companies are notorious hoarders of cash, which means they have the ammunition to pay dividends if they want to. Preferred funds include Jupiter Japan Income and Morant Wright Nippon Yield, with respective dividend yields of 2.3 per cent and 2.8 per cent.
Anyone looking to buy a Japanese investment fund should ensure it fits into a well-diversified portfolio. It should also be viewed as a long-term investment only.
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