Income & Growth Rating 2023: CC Japan

CC Japan Income & Growth (CCJI) is designed to offer long-term exposure to the growth and income potential in Japan. Japan has been undergoing a renaissance in recent years, with radical reform programmes aimed at generating higher returns on the capital invested by companies, which are benefitting investors in numerous ways.

Japanese companies are cash-rich, and increasingly this cash is being returned to shareholders via dividends or buybacks. Manager Richard Aston’s dividend growth strategy looks for companies which are demonstrating strong cashflow generation and have the ability and willingness to increase distributions to shareholders. This approach is designed to appeal to both income-seekers and long-term growth investors who want to benefit from the steady compounding of cashflows.

As we discuss in the Performance section, CCJI has performed well over the past year, particularly against its peers, which tend to have a strong bias to high-growth companies that has hindered returns in a higher-interest-rate environment. CCJI’s quality and dividend disciplines give it a more balanced stylistic exposure which has helped as the growth style has fallen out of favour.

Richard is optimistic about the short-term future for Japan, with relatively modest levels of inflation expected and a surge in economic activity likely after its belated reopening from the pandemic in the autumn. As a result, he has tilted the Portfolio more towards domestically focussed small and mid caps.

CCJI yields 3.1% on a historical basis, with robust cover thanks to a special distributable reserve. Even during the pandemic, cover by current-year earnings never fell below one.

We think CCJI is an attractive ‘buy and hold’ strategy to use to invest in Japan. The trust’s total return approach to investment, with a dual focus on the growth potential in the shares of a company and its dividends, should provide relatively stable returns.

This is thanks to the compounding of dividends, particularly as Japanese companies become more focussed on maintaining or growing dividends rather than keeping a fixed payout ratio of earnings. Meanwhile the lack of extreme style biases is also likely to appeal to long-term investors. Recent events have reminded us that pronounced style biases can be both very beneficial and very painful for investors when the macro becomes volatile.

Some investors are cynical about Japan, which suffered two and a half decades of poor returns following the bursting of a bubble in the 1980s. But that was over 30 years ago now. In the past decade a sea change in Japanese business culture has helped the Topix outperform the FTSE considerably in GBP terms and generated numerous opportunities for active managers to add alpha by spotting companies which are unlocking value in various ways for shareholders.

In our view these attractions are compounded by the near-term outlook for Japan. A late pandemic reopening trade, a weak yen and major trading partner China’s reopening are all reasons we think the country could perform well versus its developed market peers in 2023.