Coupland Cardiff Japan Income & Growth Trust (CCJI) is the only equity income trust focussed on Japan. CCJI has been run by Richard Aston since its inception, and he runs a concentrated portfolio of typically 30 to 40 stocks.
CCJI yields 3.5% and has been able to grow its dividend since inception, with revenues comfortably exceeding its dividend each year. Despite the pandemic, Richard notes that the vast majority of positions in his portfolio have been able to maintain or grow dividends. Some holdings have faced greater challenges, notably REITs focussed on hotels, and CCJI has seen some dividend cuts in its portfolio. Nonetheless, Richard expects portfolio-level income to remain covered, and dividends on a look-through basis to remain well covered by underlying company earnings.
As we outline in the Portfolio section, CCJI’s portfolio is constructed through a combination of quantitative and qualitative analysis. A key trend underpinning many of CCJI’s holdings is the ongoing improvements to corporate governance in Japan and the associated dividend culture.
CCJI has outperformed its benchmark index, the TOPIX, over five years, generating a five-year NAV return of 67.1% over the period compared to the benchmark’s 66.4%. While the trust suffered during the initial impact of the pandemic, not helped by significant structural gearing, it showed clear signs of recovery in the latter months of 2020, as we discuss in the Performance section.
CCJI currently trades at a 13.5% discount, one of the widest in the peer group, after a period in which strategies with a tilt towards value (as an income fund naturally has) have been out of favour. Prior to 2019 CCJI had typically traded at a premium.
We view CCJI’s offering as being somewhat unique within the Japanese trust space. Not only does it offer the highest yield of any Japan trust but it also offers a quality bias with a valuation-sensitive process. This leads the trust to not only offer diversification benefits, but also a resilience to its performance given the defensive characteristics of many of its high-dividend-paying stocks despite the structural gearing (which has helped support upside capture).
Much like Richard, we also believe that the Japanese equity market offers the likelihood of exceptional reliability in dividend payments going forward, certainly more than is the case with its Western peers. This is something we have seen with COVID-19, in the form of the relatively small reduction in dividend payments from both CCJI’s underlying holdings and the wider Japanese market compared with the mass reductions seen in the UK, Europe and the US.
While CCJI has lagged its peers in 2020, we view there as being potentially strong tailwinds supporting a reversal of fortunes. A post-pandemic economic recovery could favour many value-orientated companies as investors flock back to more economically sensitive sectors, reversing the growth-over-value trade which CCJI has unfortunately been disadvantaged by. This would be in addition to the country-specific tailwinds supporting Japanese equities, i.e. increased demand from overseas investors and corporate governance reforms. All of these are factors which could simultaneously be catalysts for the narrowing of CCJI’s current anomalous discount.
|Trades at wider discount than its historical average, offering a good entry point
||Has underperformed peers as a result of the current COVID-19-related market dynamics
|Post-COVID-19 economic recovery could favour CCJI’s valuation-sensitive allocation
||21% gearing can amplify losses during market downturns
|Highest dividend yield of the AIC Japan sector, and above its benchmark’s
||Often unable to capitalise on ‘new Japan’ trends due to valuation sensitivity