The benefits of including Japan within an Asian portfolio

Witan Pacific is the only UK investment trust to invest across the entire Asia Pacific region, including Japan. We speak to one of Witan Pacific's investment managers, Arnout van Rijn of Robeco Institutional Asset Management, to find out why he thinks shareholders can benefit from this region.

Witan Pacific is the only UK investment trust to invest across the entire Asia Pacific region (including Japan) - why do you think its shareholders benefit in including Japan within an Asian portfolio?
To us Japan is a very natural part of the portfolio as it is integral to Asia and Asian trade. Regional companies compete throughout the region including Japan. North Asia is an important region for high end manufacturing and technology, historically consisting from Japan, Korea and Taiwan, but increasingly Chinese companies compete in these high added value areas. Japan makes up 40% of the Asia-Pacific universe and not excluding Japan leaves a much larger opportunity set compared to excluding Japan. This provides us with a tremendous pool of stocks to select the most attractive ones from.

You say you are bullish on the outlook for Japan - why?
In Japan we find a lot of attractive stocks of which many are supported by the secular driver of improving corporate governance. The latter has led to a dramatic improvement of return on equity levels from low single digits to 8.3% (as at 30/09/2019). Although the Bank of Japan's inflation target may be too ambitious, we deem a return to deflation unlikely. The market trades at a discount of about 25% to global levels and it is supported by a 3.1% dividend yield. Tourist arrivals are at record highs and we witness early signs of a cyclical bottom in the economy of this key global supplier of high tech materials and components. Employment is robust driven by a labour shortage; unemployment is 2.2% and wages are on the rise.

What about political risks in the region - will Japan be affected by a trade war for example?
Political risks are always present and they have been on the rise over the past twelve months. Relatively good news comes from the US-China trade dispute recently. The tone in the trade dispute has shifted to more positive and markets were driven higher as a result. Although sentiment can completely change on the back of a tweet nowadays, we believe there is more to go for markets if the veil of uncertainty is fully lifted. Companies will then be willing to make long-term investment decisions again which will take regional growth higher. Japan is not shielded from any geopolitical risks but the risk that it will be at the center of the trade dispute soon seems small.

How does a country with an ageing demographic and anaemic economic growth play host to good investment opportunities at a corporate level?
Japan's economy is not expected to grow significantly but there are plenty of strong companies listed and valuation levels in many cases are attractive. In addition, the secular trend of improving corporate governance which we mentioned earlier contributes to the attractiveness of the Japanese markets, and plays an important role for many of the Japanese stocks we hold for the portfolio. Japan is also host to many leading high tech companies that are not available in all other Asian markets.

How has corporate governance changes since you first started investing in Japan?
Is has changed significantly. Cross shareholdings have been reduced, there is more focus on profitability than before, where historically growth was the key focus area. Also, minority shareholders are increasingly taken seriously. There is still room to improve though as balance sheets overall remain lazy, as we like to say, i.e. many companies are financed too conservatively which leaves to below potential returns. To be clear, we are not looking for companies with outrageous debt levels which do great when all is good and fall apart when sales turn for the worse, but some leverage is certainly healthy; it lowers the overall cost of capital and generally improves returns. Having said that, elaborating again on the positive side; we witness a lot of momentum for improving corporate governance now as from our conversations with companies' management we conclude that all have clearly thought about it and are generally able to articulate their plans clearly. This in itself is quite a change. Also, there are now significantly more independent directors on Japanese company's boards and boards are more diverse. All this is very different from 10 years ago.

Robeco is well known for its strong focus on Environmental, Social and Governance issues - can you explain what this entails and why it is important for investors?
It makes us better informed investors. Environmental, Governance and Social factors have more potential to damage a company's reputation than ever before in an era where transparency and awareness around the importance of these areas are better developed than ever before. Sister company RobecoSAM has been engaged in the field for decades and we have been very fortunate to get their in-depth information first hand.

Witan Pacific Investment Trust plc is an equity investment. Please note that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuation and you may not get back the amount originally invested.
This material is a marketing communication issued and approved by Witan Investment Services Limited for information purposes only and does not constitute a solicitation or personal recommendation in any jurisdiction. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne's Gate, London, SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority.