Q&A Series: Missing out on the Japan rally? Generate both capital growth and income with this fund.

Nikko Asset Management (Nikko AM) is a global asset management firm operating in 11 countries and regions* around the world with over USD 219.1 billion assets** under management, as well as 850+ professionals across 30 nationalities globally. Its company mission is to deliberate innovative and progressive solutions through a high-conviction fund management to investors internationally.

In this edition of our Q&A Series, we take a deeper dive into the Nikko AM Japan Dividend Equity Fund (available on our platform in the SGD, SGD-H, and USD-H share classes). We are pleased to have Nikko AM provide their insights on this fund, for investors looking to gain exposure into the Japanese market and wish to enjoy both capital growth and income.

* Including overseas subsidiaries, affiliates and minority joint ventures. Also includes Hong Kong.

** AUM is preliminary figures based on consolidated assets under management and advice of Nikko AM, including subsidiaries, but excluding minority affiliates and minority joint ventures.

1. How would you describe the Nikko AM Japan Dividend Equity Fund? What sets the fund apart from its peers?

Bottom-up research, a concentrated portfolio, and strong downside protection are the distinctive features of our fund.

The fund focuses on a diversified portfolio of dividend-producing equity investments listed and traded on the Tokyo Stock Exchange that offer attractive and sustainable dividends from companies with relatively strong sustainable cash flows, stable growth and stable dividend payout.

It aims to provide a total return of capital growth and income over the medium to long term.

2. Here at iFAST, Japan is our top equity pick. From Nikko AM’s perspective, could you share with us why you believe the Japanese equity market deserves investors’ attention?  

We believe that there are three key considerations that are supportive of investors increasing their long-term exposure to Japan, the world’s third-largest economy.

To start, Japan’s political stability is the envy of much of the rest of the world. In an era of increased polarisation, Japan’s political environment is known for its stability and policy continuity.

Second, one of the key drivers of success within the Japanese market has been its corporate governance reforms since 2014. The 2014 introduction of the Stewardship Code was a watershed moment for changing how investors interact with corporations. Japan’s Corporate Governance Code was introduced shortly after in 2015, with further revisions in 2018 and 2021. Key provisions included companies increasing the number of independent directors, full disclosure of policies and voluntary measurable targets to appoint more women and non-Japanese professionals.

In April 2022, the Tokyo Stock Exchange (TSE) underwent a significant restructuring. The result is that companies face far more stringent listing criteria and must meet specific corporate governance standards or risk being demoted or delisted. In March 2023, the TSE took an unprecedented move by calling on companies listed on Prime and Standard markets to draft specific plans that focus on enhancing shareholder value.

Third, it is important to consider where Japan is regarding the return to inbound tourism. Japan’s government had been quite conservative in its approach to reopening its borders to visitors, especially considering the importance of national and local elections over the past year. This is understandable given Japan’s senior citizens make up a large proportion of the electorate and have the most to fear from the spread of COVID. However, with those elections now in the past, the government clearly recognises it can be more progressive in its approach to travel restrictions and tourism. Now, tourists are returning to Japan and we believe this will gain momentum.

Therefore, considering things from the political, corporate governance, and international tourism perspectives, there are plenty of compelling reasons for global investors to take a closer look at Japanese equities.

3. Take us through your investment philosophy and stock selection process. How does the team choose the stocks and what metrics are taken into account? 

Our Japan Dividend Equity Strategy is based on the belief that dividends reflect the strength of company fundamentals, e.g., earnings potential, financial strength, and management strategy, and are therefore an effective factor to focus on for long-term investment.

We go beyond current levels of dividend yield, focusing on a company’s growth potential. Through bottom-up corporate research, we assess each company's competitiveness, cash generation potential and business strategy. Our aim is to deliver stable total returns from both income and capital gains.

Our investment process has four clear steps. We begin by defining our investment universe. We cull out stocks with high credit risk, perceptible corporate governance risk, or extremely low liquidity to derive our top 1,000 stocks by market capitalisation on the Tokyo Exchange.

Next, we put our investment universe through a dividend yield screen, based on the 12-month forward dividend yield¹. The universe is narrowed down to stocks with above-average dividend yield.

Through bottom-up corporate research, we identify high quality companies that are competitive and have the ability to generate cash flow. This further narrows down our potential investments.

The investment team assess each company through criteria such as change in market share, trend in product prices, change in return on invested capital, cash conversion cycle² trend, factors that affect free cash flow³ and level of net cash.

¹This is a projected 12-month dividend payout of a company as a percentage of the current share price of the company. Forward dividend yields are generally used in circumstances where companies issue stable dividends and announce their dividend policies, making yields predictable.

²Cash conversion cycle is the time a company takes to convert cash investment in the business into cash return in the form of sales.

³Free cash flow is the cash a company generates after paying for its operating expenses and capital expenditures.

4. We note that the fund is concentrated in the industrial, financials and materials sectors. What are the reasons behind this positioning?

We do not take a top-down view in terms of sector allocation. Therefore, it is simply a result of us finding attractive names in these sectors from a bottom-up, fundamental perspective, based on our focus on dividend yield and dividend growth outlook.

In selecting stocks, higher-than-average dividend yield is not sufficient. We carefully select companies that can continuously grow their dividends by examining their competitiveness, cash generating ability, financial stability, and attitude towards shareholder distribution.

The portfolio is characterised by low volatility/low systematic risk due to the large number of stable growth stocks with high profitability and solid financials. Currently, many of the portfolio's holdings are in IT services, electronic materials, telecommunications companies, trading companies, automobiles, specialty retailers, construction, and banks. This adds up to relatively high exposure to industrials, financials and materials.

5. How has the fund performed since inception, looking at total returns as well as dividend yields?

The Nikko AM Japan Dividend Equity Fund (SGD Hedged Class) has delivered decent absolute returns since its inception in July 2013, with annualised (net of fee) returns of 10.46% in Singapore dollar (SGD) terms, as at end-June 2023, assuming all dividends and distributions are reinvested.

Please refer to the fund factsheet for more details of performance.

6. How does the fund manager assess the sustainability of dividend payments during periods of economic uncertainty? Also, how does the fund manager balance the pursuit of dividend yields with the objective of capital growth over the long-term?

In selecting stocks, we focus on companies that have a good balance between investment in growth opportunities and shareholder distribution against a backdrop of strong earnings and high cash balance, and we select companies that can be expected to achieve sustainable dividend growth.

We are increasingly seeing more companies in Japan that effectively put a floor on dividend payments, which is quite important in a period of economic uncertainty. Traditionally, companies with a payout ratio target could cut dividends by a sizable amount when earnings decline.

However, companies with more progressive dividend targets explicitly say that they either increase or maintain their dividend payout, which removes the downside risk on dividends for investors. Companies with dividend on equity (DOE) target can also be considered to have lower downside risk given that their dividend payments are linked to shareholders equity and not the more volatile earnings.

We carefully evaluate dividend policies of the companies as well as how they are positioned in the overall capital management planning to increase our conviction of our stock ideas to profit from not only income gains but also capital gains.

7. Looking ahead, what are the key strategic themes of the fund? How is the fund position to navigate and capitalise on these themes or opportunities? 

We will focus on companies whose management teams have shown a change in its stance towards shareholder returns, such as by clearly stating in mid-term management plans that it intends to raise the dividend payout ratio. The categories we will focus on include IT services, network construction, and outsourcing companies that provide solutions for improving productivity, which is the biggest challenge for Japanese companies; housing, real estate, construction, and construction materials-related companies that are less susceptible to the external environment and can be expected to achieve stable performance; and retail specialty stores that can be expected to expand their performance due to industry restructuring.

The main focus is on domestic demand-related companies with stable growth, such as retail specialty stores, which are expected to expand their business performance. However, taking into account the possibility that global business confidence may improve over the next year, we are gradually increasing our holdings in cyclical sectors such as electronic materials, electronic components, and machinery companies, which have a high global market share, and automobile-related companies, which are expected to expand their performance due to production recovery, by selecting companies with stable dividend payments.

We are gradually increasing our holdings in cyclical sectors such as electronic materials, electronic components, machinery, and automobile-related sectors where we expect earnings to expand due to production recovery. We are also focusing on general trading companies related to energy supply, which is becoming increasingly important, and banks, which are expected to benefit from the anticipated changes in Japan's monetary policy. By actively investing in quality stocks whose share prices lag behind their fundamentals among companies that are expected to increase dividends, we will build a portfolio that can earn steady returns as the market factors in improved earnings and dividend increases.

---

Answers are provided by Nikko Asset Management Asia Limited (“Nikko AM Asia”) according to questions above from iFast Financial Pte Ltd. This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.

Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko AM Asia.

Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.

The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

Nikko Asset Management Asia Limited. Registration Number 198202562H