Foreword
By Annabel Brodie-Smith
With a Japanese election on October 22 and the political tension in North Korea, it’s topical that this month’s Compass is looking at the prospects for Japan. Investment company managers from the Japan and Japanese Smaller Companies sectors give us their perspectives on the snap election, where they are finding opportunities and the outlook for Japan.
Do watch our video where I talk to Praveen Kumar, Manager of Baillie Gifford Shin Nippon, Nicholas Price, Manager of Fidelity Japanese Values and Andrew Rose, Manager of Schroder Japan Growth Fund. There’s also an article by Richard Aston, Portfolio Manager of CC Japan Income & Growth Trust, on the opportunities presented by Japan.
Many investors tell me how they struggle to choose a platform for their investment company holdings as the pricing structure is a minefield. We’ve done some research with the lang cat, a platform consultancy, to show the cost of holding portfolios of investment companies between £5,000 to £1 million on 26 different direct-to-consumer platforms. Take a look.
To make it easier to understand the lang cat has produced colour-coded tables to show the annual costs (as a % of your invested assets) of investing on each platform.
You may not have heard of the ‘sandwich generation’ but these are people aged 35 to 55, who have elderly parents and children. We’ve done some research with them which shows half (49%) said not having enough money for retirement was their biggest financial concern, followed by their children’s school/university fees (36%) and not being able to help family members financially (23%).
"Many investors tell me how they struggle to choose a platform for their investment company holdings as the pricing structure is a minefield"
– Annabel Brodie-Smith, AIC
As a member of the sandwich generation I can definitely relate to the concerns expressed but find it depressing that women are less confident about investing in financial markets than men. Clearly, there’s still a need for more financial education on investment.
"As a member of the sandwich generation I can definitely relate to the concerns expressed but find it depressing that women are less confident about investing in financial markets than men"
– Annabel Brodie-Smith, AIC
Finally, allow me to remind you about the 8th annual VCT and EIS Investor Forum, organised by AngelNews, which will be taking place in London on 24th November.
The forum allows private investors to meet with the VCT and EIS fund management community. Keynote speakers for the forum will include Sir John Timpson CBE, owner of Timpson, the UK retail shoe repair chain, and Ian Livingstone CBE, author and entrepreneur. For more information and to register please follow the link below.
The 2017 Nex Exchange VCT and EIS Investor Forum (London)
Hope you have a good October.
Annabel Brodie-Smith
Communications Director, AIC
Making the case for Japan
Can positive economic growth and strong performance continue?
On Monday 25 September, Prime Minister of Japan Shinzo Abe called for a snap election to take place in October, a year early. Japan’s economy continued to grow in the second quarter of 2017 with economists expecting positive figures in the coming months. Reports are of the view that Mr Abe’s economic record will be a significant pillar of his campaign, along with his response to the growing crisis over North Korea.
Investment companies investing in Japan, meanwhile, have performed strongly over the year to date (to 30 September 2017), with the Japan and Japanese Smaller Companies sectors returning 17% and 27%, respectively. Over the longer term, the Japan sector is up 139% over 10 years (to 30 September 2017), whilst the Japanese Smaller Companies sector is up 135% over the same period.
On Tuesday 26 September, the AIC held a media roundtable with Praveen Kumar, manager of Baillie Gifford Shin Nippon, Andrew Rose, manager of Schroder Japan Growth Fund and Nicholas Price, manager of Fidelity Japanese Values to discuss the outlook for Japan and where they are finding opportunities, as well as the crisis over North Korea and Mr Abe’s decision to call a snap election. Their thoughts have been collated alongside those of other managers.
Snap election
Andrew Rose, manager of Schroder Japan Growth Fund said: “Heightened geopolitical tensions have contributed to a strengthening of Mr Abe’s domestic poll ratings, such that he has opted for a snap election. Current indications are that he should win this handsomely, although, as we know, nothing is a given in politics.”
Richard Aston, manager of CC Japan Income & Growth Trust said: "Abe is looking to benefit from a rebound in his popularity and the disarray of the major opposition party to secure the mandate to continue pushing through the economic reform policies that have become synonymous with his leadership.
“I'm not sure anyone would want to call the outcome of elections after last year but it is widely expected that he will be given the opportunity to continue."
"While political tensions with North Korea may drive sentiment in the near term, I am optimistic on the Japanese equity market from a fundamental perspective"
– Nicholas Price, Fidelity Japanese Values
Nicholas Price, manager of Fidelity Japanese Values said: “Support for Prime Minister Shinzo Abe has rebounded in recent weeks as tensions with North Korea increased. The current consensus view is that Abe will win the election, but probably with a reduced majority. While investors widely expect Abe to re-appoint Haruhiko Kuroda as Bank of Japan governor in April next year, a weakened majority could impact this scenario.
“As a bottom up stock picker I prefer to look beyond near-term macro and political noise, and focus on company fundamentals. However, Abe’s pledge to increase government spending on education could throw up some interesting investment opportunities.”
North Korea
Richard Aston, manager of CC Japan Income & Growth Trust said: “Japan’s geographic proximity to North Korea makes it more than just an interested observer in the escalating tensions between the rogue Asian state and the United States. Increasingly aggressive rhetoric from both sides appears to have raised the risk of conflict and has certainly affected investment flows in the region. Japan, however, has many strained relationships throughout Asia and the current international spat is an extension of these difficulties.”
Nicholas Price, manager of Fidelity Japanese Values said: “Improvements in macro and micro level fundamentals have been eclipsed by geopolitical factors that have spurred demand for the yen and capped market upside.
“While political tensions with North Korea may drive sentiment in the near term, I am optimistic on the Japanese equity market from a fundamental perspective.”
Outlook for Japan
Richard Aston, manager of CC Japan Income & Growth Trust said: “As is the case in recent weeks heightened tensions have frequently had a detrimental but ultimately only a short-term impact on the equity market and with hindsight creates interesting investment opportunities.
“In this case the opportunity has arisen just as the domestic economy is recovering, company earnings are healthy and importantly shareholders are benefiting directly through ongoing improvements in corporate governance. Japan has consequently delivered the fastest growth in dividends of the major equity markets in recent years and yet with record high levels of accumulated cash on balance sheets and a high aggregate dividend cover, the potential for further improvements is significant. This shift in consensus behaviour is not to be underestimated."
Nicholas Price, manager of Fidelity Japanese Values said: “The current economic expansion is the third longest in the post-war period and with global growth running above trend, the near-term outlook for the Japanese economy remains favourable. Corporate earnings have recovered strongly from the second half of 2016 and the latest quarter produced a near 30% increase in net profits, led by the manufacturing sector. And with forward earnings multiples below 14x, valuations compare favourably with other developed markets.”
"We remain very bullish on Japan and Japanese smaller companies in particular"
– Praveen Kumar, Baillie Gifford Shin Nippon
Video: Japan panel discussion with Praveen Kumar, Manager of Baillie Gifford Shin Nippon, Nicholas Price, Manager of Fidelity Japanese Values and Andrew Rose, Manager of Schroder Japan Growth Fund.
Praveen Kumar, manager of Baillie Gifford Shin Nippon said: “We remain very bullish on Japan and Japanese smaller companies in particular. The operating environment for the latter has improved considerably over the years. Both domestic and overseas end demand for these businesses continues to be strong.
“Government policy remains geared towards industry deregulation, with a number of progressive policies already implemented in this regard.
“A combination of a favourable operating environment and low valuations relative to developed market peers means that Japanese smaller companies represent a very compelling proposition for long-term investors.”
Andrew Rose, manager of Schroder Japan Growth Fund said: “The Japanese stock market has lagged most other markets in 2017 in spite of robust economic and corporate fundamentals. The economy has grown for 6 consecutive quarters, which has not happened for 12 years and corporate profits have entered a positive phase of the revision cycle. Valuations are relatively attractive and investors should continue to benefit from improving corporate governance, one of the main successes of Abenomics.”
Nicholas Weindling, manager of JPMorgan Japanese Investment Trust said: “Japan’s overall outlook is looking pretty healthy at the moment with several factors at play which are starting to meld together. Broadly speaking the Japanese economy is getting better, as is the global economy. Japan will stand to benefit as this continues to happen. Japan also offers investors low valuations, with price/earnings, price/book and dividend yield all looking good compared to other developed markets.”
Finding opportunities
Praveen Kumar, manager of Baillie Gifford Shin Nippon said: “Our favourite hunting ground for stock ideas is within what we classify as ‘online disruptors’. These are disruptive, innovative and rapid growth businesses usually run by young and ambitious entrepreneurs. We are continuing to find these types of companies across a number of sectors in Japan.
“Additionally, we are seeing a number of investment opportunities emerge due to the ongoing labour shortage situation in Japan as well as within biotech where a number of companies are developing exciting and potentially world leading therapies and drug discovery platforms.”
Nicholas Price, manager of Fidelity Japanese Values said: “In Japan, the mid-to-small cap equity space is a fertile hunting ground that offers a wealth of under-covered and under-researched names. For example, there are almost 2,000 Japanese companies covered by less than five sell-side analysts compared with around 400 in the UK.
"In Japan, the mid-to-small cap equity space is a fertile hunting ground that offers a wealth of under-covered and under-researched names"
– Nicholas Price, Fidelity Japanese Values
“With comparatively few analysts undertaking this level of research, the alpha generating potential of smaller companies can be much more significant than for large caps given the greater market inefficiencies.
“And being on the ground in Japan means that we are well placed to find under-researched companies in the early stages of their development and capture the significant expansion in multiples that can occur as the story becomes more widely recognised by the market.”
Nicholas Weindling, manager of JPMorgan Japanese Investment Trust said: “We find compelling investment opportunities in structural growth areas such as the growth in the penetration of e-commerce, automation, Japan’s ageing population and companies prioritising improving shareholder returns.
“One of the key reasons we focus on long term structural growth names is that they tend to be less sensitive to the Yen/Dollar exchange rate. We also find strong investment opportunities in new Japan brands that are growing globally, whose products stand for reliability, quality and safety.”
Andrew Rose, manager of Schroder Japan Growth Fund said: “Some of the more attractive opportunities are in cyclical parts of the market such as machinery, auto related companies and electronic component manufacturers.
“Amongst domestic sectors financials look undervalued and, selectively, we are also seeing opportunities in the retail sector.”
Japan and Japanese Smaller Companies investment companies’ performance (to 30 September 2017). Source: AIC using Morningstar
Making sense of platforms
The costs of holding and trading investment companies on platforms differ widely. Our new research reveals the full picture
Many investors struggle to choose a platform for their investment company holdings as the pricing structure is a minefield. To help, we have published research on which are the most cost-effective platforms for holding and transacting investment company shares.
Conducted by the lang cat, a platform consultancy, the research shows the costs of holding portfolios of investment companies between £5,000 and £1 million on 26 different direct-to-consumer platforms. It also throws light on which platforms offer special rates for regular monthly investing or automatic dividend reinvestment.
Platform charges are split into ongoing costs (also known as admin costs or custody costs) which are charged regardless of how much you trade, and transaction costs for buying or selling investment company shares.
Ongoing costs vary widely. Six platforms have no ongoing costs when you hold investment companies; seven have fixed fees that vary from £20 to £120; and the remainder have charges based on a percentage of your assets that may or may not be capped.
"Ongoing costs vary widely. Six platforms have no ongoing costs when you hold investment companies; seven have fixed fees that vary from £20 to £120; and the remainder have charges based on a percentage of your assets that may or may not be capped"
– AIC
Standard transaction costs vary from £5 to £12.50, though 12 of the 26 platforms offer much lower fees (typically between £1 and £2) if you invest regularly.
Commenting on the research, Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “Platform charges can be complicated, and working out which platform offers the best deal can be bewildering for investors. We have launched this research with the lang cat to help investors compare costs and make an informed decision.
“However, when choosing a platform, there are many other factors to consider besides costs, such as the level of service, which investments can be held, and whether the platform offers the features and functions that you need.”
Steve Nelson, Head of Research at the lang cat, which conducted the research, said: “We were heartened that our work with the AIC highlighted a wide range of platforms which cater for investment companies. For the particularly cost conscious, there are significant savings to be made if you shop around. For example, many providers cap their ongoing platform charge (and some don’t charge for custody at all) if you invest outside of mainstream open-ended funds.
“But of course, price is only one aspect of platform selection. How much help you need choosing investments, how much importance you attach to online functionality and how much you value a big brand name are some of the other things you may want to think about.”
"For the particularly cost conscious, there are significant savings to be made if you shop around"
– Steve Nelson, Head of Research, the lang cat
What’s in the research
The research includes a table detailing the costs of holding investment companies on each of the 26 platforms.
To make comparisons easier, the lang cat has also produced ‘heatmaps’ to show the annual costs (as a % of your invested assets) of investing on each platform, based on portfolio sizes ranging from £5,000 to £1 million, and assuming four buy or sell trades are made per year. The colour of each cell indicates relative cost, where green is cheaper and red is more expensive.
Annual cost of investing in portfolios of investment companies on different platforms*. Source: AIC/the lang cat. For detailed assumptions, see Notes.
The research will be regularly updated and is available on the AIC’s website.
Notes
* The heatmap looks at the cost of investing on each platform for one year. Calculations include ongoing platform fees, any additional wrapper charges and trading where applicable. It is assumed that the investment is within an ISA, with 100% held in investment companies and four transactions (buys or sells) made in the year. Data is based on publicly available charging structure information with some details verified via conversations with platforms in August 2017. Aviva Consumer Platform and Santander do not offer investment companies. Source: AIC/the lang cat.
A rising sun
Richard Aston, Portfolio Manager of CC Japan Income & Growth Trust, examines Japan's encouraging outlook
Richard Aston, Portfolio Manager, CC Japan Income & Growth Trust
The CC Japan Income & Growth Trust has been designed to identify exciting investment opportunities as the consensus behaviour in Japan evolves to a more consistent trend more easily comparable to those historically associated with Western developed markets.
The trust invests in companies that can complement expansive business strategies with the need of their shareholders to be rewarded with appropriate annual distributions that reflect the underlying growth, but also recognise the value to investors of the sustainability of dividends and share buy backs.
Opportunities at all sizes
The opportunities are many and reflect the fact that Japan has a large number of internationally renowned industry leaders, as well as prominent participants in the growth of other parts of Asia and dominant domestic players across a wide range of industries.
These opportunities are not confined to large cap companies alone, with attractive candidates identified in the mid and small cap areas where management incentives are often more closely aligned with those of minority shareholders.
"Corporate governance in Japan has been making steady and meaningful improvements for over 10 years"
– Richard Aston, CC Japan Income & Growth Trust
Corporate governance
Although it has gained more attention under the umbrella of Abenomics, corporate governance in Japan has been making steady and meaningful improvements for over 10 years. Most notable over this timeframe has been the greater focus on returns to shareholders via increasingly attractive policies of dividend distribution and share buybacks. At a time when investors globally have been challenged to find sources of income this is a timely evolution.
Despite the exciting trends to date, there is scope for considerable improvement going forward. Recent data highlights the high levels of cash accumulated on corporate balance sheets and the historically high operating cashflow generation, both which support the potential for even greater distributions to long-neglected shareholders who have been rewarded with double digit dividend growth in recent years, as well as record levels of share buybacks.
Developments for investors
The current outlook for Japan is favourable with signs that domestic economy is in recovery and that corporate earnings trends are healthy. However, this may not always be the case. As history shows the Japanese economy’s dependence on manufacturing can exaggerate the cyclical swings in demand.
When this does occur the high levels of retained cash, high aggregate dividend cover and most importantly the improved understanding of the responsibilities of company management towards shareholders should mean that investors are not penalised during the downturn.
These are exciting developments for investors in Japan and should ease some of the concerns of those who have considered the country too unpredictable in the past.
"Heightened tensions have frequently had a detrimental but, ultimately, only a short term impact on the equity market"
– Richard Aston, CC Japan Income & Growth Trust
Recent tensions
Japan’s geographic proximity to North Korea makes it more than just an interested observer in the escalating tensions between the rogue Asian state and the United States. Increasingly aggressive rhetoric from both sides appears to have raised the risk of conflict and has certainly affected investment flows in the region.
Japan, however, has many strained relationships throughout Asia and the current international spat is an extension of these difficulties. As is the case in recent weeks heightened tensions have frequently had a detrimental but, ultimately, only a short term impact on the equity market and with hindsight this has created a number of investment opportunities.
The sandwich generation
Not having enough money for retirement is the biggest concern
Average life expectancy has generally been increasing, and saving for retirement is the biggest concern for the “sandwich” generation.
In a recent survey from the AIC of the “sandwich” generation aged 35 – 55 who have elderly parents and children and a minimum household income of £50k, research found that half (49%) said not having enough money for retirement was their biggest financial concern. This was followed by their children’s school/university fees (36%) and not being able to help family members financially (23%).
Saving for retirement
Three quarters (75%) of people interviewed said they had either a final salary, defined benefit pension or a defined contribution pension from their employer, and 47% said they had a personal defined contribution pension and/or a Self-Invested Personal Pension (SIPP) arranged individually.
Whilst having this pension provision, nearly half (48%) of people said they still expect any money they currently have saved outside their pension to be used for retirement.
"49% said not having enough money for retirement was their biggest financial concern"
– AIC
Research revealed that, on average, the “sandwich” generation are planning to save £419,248 for retirement with one fifth (21%) of those surveyed said they were planning on saving between £250,000 and £500,000 for their retirement.
On average, men are planning to save over £100,000 more than women for their retirement, £463,922 in comparison to £361,329. Interestingly, a quarter (25%) said they didn’t know how much they were planning to save.
Financial contributions
Unfortunately, it’s not just their own retirement that the “sandwich” generation are concerned about when it comes to their finances. Nearly a third (31%) of people said they were currently contributing financially to support their child/children after they finished school and a further 46% were planning to contribute.
The average amount the “sandwich” generation expect to contribute is £40,088. Interestingly though, almost half (46%) think their children will be better off financially when they reach their age.
"46% think their children will be better off financially when they reach their age"
– AIC
While half (52%) of those surveyed aren’t planning or currently contributing financially to help their parents or parents-in-law, those who are (34%) said the average amount they expect to contribute is £18,378, which would go towards bills or expenses, medical expenses and/or retirement home.
Saving habits
When it came to their saving habits, an overwhelming number (66%) said they use a cash savings account and/or a cash ISA (59%) to save money, with a stocks and shares ISA the third most popular choice (35%). While most (50%) expect any savings (excluding pension savings) they have to be used for “a rainy day”, retirement (48%) was the second most popular option followed by a holiday (42%) and property (32%).
Of those who have money saved, their 20s and 30s were the most popular age groups for when they first started saving but a quarter (25%) have been saving since childhood.
Investments
When asked what they would invest in if they had money to put aside for 10 years and could only invest in one thing, property came out on top (44%), followed by stocks and shares (27%).
49% of people said they felt confident about investing in the financial market, but men are considerably more confident about this than women, 60% versus 36%.
When asked to best describe their attitude towards investing, 46% of people feel they’d like to get involved with investing but don’t know where to start. This could be a potential opportunity for financial advisers, especially as a quarter (25%) of people said they plan on using a financial adviser in the future, while another quarter (26%) would consider using an adviser.
Interestingly, those in the North of England seemed most likely to use an adviser’s services, as about a third of people in the West Midlands (32%), Yorkshire & Humberside (31%) and the North West (30%) said they plan on using a financial adviser in the future.
Commenting on the research, Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “For the ‘sandwich’ generation, saving for their retirement is clearly a big concern, and with plans to contribute financially to support their children and parents, it’s perhaps no wonder.
"46% of people feel they’d like to get involved with investing but don’t know where to start"
– AIC
“It’s revealing that more people chose property as the only asset they would invest in for ten years than stocks and shares. This has to be related to the fact that only half of interviewees were confident about investing in the financial markets, with men being more confident than women. Nearly half also want to start investing but don’t know where to start. This is clearly an opportunity for financial advisers and highlights the need for financial education.
"If you invested £100 into the average investment company every month for the last 25 years - that’s a total of £30,000 – this would have grown to over £124,000 at the end of September 2017"
– Annabel Brodie-Smith, AIC
“Investors could consider an investment company for their long-term saving. Investment companies have strong long-term performance, due to the benefits of the closed-ended structure and income advantages. Investors can regularly invest from £50 a month or invest lump sums which can add up over time. If you invested £100 into the average investment company every month for the last 25 years - that’s a total of £30,000 – this would have grown to over £124,000 at the end of September 2017. A significant portion of what the ‘sandwich’ generation would like to have in their retirement pots.”
