CC Japan Income & Growth 30 June 2020

The CC Japan Income & Growth Trust (CCJI) aims to provide shareholders with dividend income combined with capital growth, mainly through investment in equities listed or quoted in Japan. Managed by Richard Aston at Coupland Cardiff Asset Management LLP, CCJI typically comprises a portfolio of between 30-40 stocks and is the only Japanese equity income focused UK listed investment trust.

The investment process, as discussed under Portfolio, seeks to identify attractive stocks through a mixture of quantitative and qualitative inputs. A common feature is a focus on identifying high quality companies with resilient cashflows and strong management teams, which have demonstrated strong consideration for shareholder interests.

Ongoing corporate governance reforms in Japan have continued to improve conditions for income investors in what has traditionally been a challenging market, and Richard believes there remains significant future income growth.

The resulting portfolio presently offers the highest dividend yield (c. 3.6%) derived from income earnings of any investment trust within the AIC Japan sectors. The board recently announced that it intends to at least match the previous year’s dividend of 4.5p per share. This dividend has been growing in recent years yet has remained well covered. Furthermore, the trust has an exceptionally deep ‘special reserve’ to support dividends going forward. Gearing is employed structurally to further boost returns.

The discount has widened to an anomalously wide (at c. 12.4%) level relative to the trust’s history, in part reflecting disappointing performance in a challenging environment. However, this environment has been exceptional and atypical relative to CCJI’s history, as outlined in the Performance section.

We think CCJI is an interesting way to diversify sources of income. While the dividend yield is not particularly high in absolute terms, it is attractive relative to the Japanese market. This is particularly so given the defensive characteristics of many of the underlying earnings streams and the fact that the dividend has been well covered in recent years. We would take the view a dividend cut is unlikely, particularly when the dividend is well supported by the revenue reserve and the ‘special reserve’. In the event that earnings were to be sufficiently impaired that the dividend were no longer covered, the idiosyncratic nature of the current crisis would perhaps justify using reserves to support it.

Following disappointing recent NAV performance, the discount is now particularly wide, especially when we consider the previously strong performance of the strategy. We believe the stockpicking approach offers downside protection in ordinary market conditions, allowing a structurally geared portfolio to trade at a beta to the benchmark of c. 1 historically. From launch in 2015 until the coronavirus crisis hit, CCJI significantly outperformed the index in NAV total return terms. Recent conditions have not been ordinary and have undoubtedly impacted performance. Trends can prove durable in the Japanese market, but the discount and dividend yield suggest a potentially attractive long-term entry point, with the latter offering investors the ability to at least ‘get paid whilst they wait’.