Baillie Gifford Japanese Income Growth Fund - November 2018

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  • 05 mins 42 secs
For historical reasons, Japan has often been overlooked by income-seeking investors. However, as Karen See, co-manager of the Japanese Income Growth Fund, explains, this is changing. Improved corporate governance is driving better alignment between companies and their shareholders, meaning higher dividend payments and a growing number of exciting investment opportunities.


Baillie Gifford

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Hello, i'm joined today by currency co manager of the japanese income growth fund welcome, karen. Some people think that japan doesn't have a dividend culture. Why do you think that is ? Well, if we look back and how much dividends japanese companies actually paid out in the last couple of decades isn't surprising that people actually have the impression. So if you look at the different payout ratio of japan, it actually legs behind his peers by quite a large margin. However, if we were to look back further in history, the picture look quite different. A hundred years ago, japan is ashley and more shareholder friendly place than that off the west, the shareholder basis, a lot more widely dispersed on dh dividend payment is actually quite common and often abundant. So what changed so much of what we have in the system today ? That's holding back copper governance in japan actually originated from the war or the postwar era. So these things such as cross shareholdings, rigidity and employment model on the outsized influence off bankers on the board, japan has not really meaningful e evolved past that since what we need to realize is that corporate ownership policy changes over time, so perhaps dividend culture is a more fluid concept that many realized other signs that this divine culture could be changing again, i think your pants and a very interesting place a development that has an agent, demographics which many people know about them. What that means is that is propelling a shift in focus in terms of what society at large ones. So back in the sixties, seventies and a bubble era, full employment on economic growth was to party. But now when you have asian population, what you want is you want to make sure that the society and economy is functioning well with a reduced workforce. All of this society change coincide with the political climate that favors change. So we finally seeing policy change happening to support these these changes in society, which is why we finally saw the introduction of copper governance code and stewardship code back in two thousand fourteen and fifteen. Are you seeing any evidence of things changing in japan ? Yes, actually, the headline figures of very encouraging. So if we look at the total amount of shareholder returns back in two thousand thirteen, so before the introduction of the two coats to that of two thousand seventeen is actually doubled, which is quite striking given there's only been four years and if we want to look at independent directors used to be their half of the list of companies do not have a single independent directors, and now over ninety percent of them have at least two if not more independent directors on a board. But what i would liketo highlights are more subtle, but nonetheless very important changes happening in the background. We've seen better alignment of interests between the board and shareholders in terms ofthe number ofthe company's having any stock based compensation plan has increased from one percent in two thousand thirteen two, seventy percent just last year for the top five hundred companies were also seeing that mork companies have explicit dividend talk it's in the medium term plan, and this reflects the fact that management of thinking harder about how to reward shareholders and how's alex allocate the capital in the most efficient way, which we think is more important off as she just paying out diffident and more companies are changing the whole structure to accommodates the newly elected independent director there's a number of companies there has a committee board structure has gone from thirty percent to about seventy percent in two years. Most of the investment implications of this so many people who many, many income investors have stay away from japan for a very long time because of the low you nature of the market. But what we see now is your penance actually, in quite a unique position to offer something different to these income hunters. What that means is that because off the continuous low dividend payout over the decades, a lot of these companies actually have quite a robust balance sheet, so what they can do is that they can continue to invest for growth as well is accelerating the dividend payout to shareholders. And what that means to us is that we can actually include companies from a wider pool off businesses. So we have, for example, the top two holdings are internet businesses, which isn't something you typically find in an income portfolio in other markets. So we're very excited that people income investors can now have the opportunity to include japan in the before you and actually be exposed to a lot of change going on there. That's. Very interesting, karen, thanks very much for joining us. Thank you.