CC Japan Income & Growth 05 October 2023

CC Japan Income & Growth (CCJI) is intended to be a long-term investment in Japanese equities, generating a total return comprising a steadily rising dividend and capital appreciation. The strategy aims to harness the compounding of cash flows within high-quality businesses, both in terms of their ability to deliver consistent earnings growth and in terms of their ability to deliver stable and growing dividends.

CCJI delivers the highest yield in the AIC Japan sector and has grown its dividend by 8.5% on an annual compound basis since launch (see Dividend). It has also done extremely well in terms of total return, delivering the highest NAV total returns in the AIC Japan sector since then – and higher returns than the AIC Japanese Smaller Companies’ sector funds have too.

In both cases, success has been built on a strategy of selecting high quality companies and paying attention to valuation. This is differentiated from the high growth strategies that predominate in Japanese equity trusts. Manager Richard Aston argues that the market is increasingly rewarding companies that have quality characteristics and strong corporate governance, thanks to ongoing corporate governance reforms which have created a different environment for investing in Japan. There is a growing awareness of the need for stability in shareholder return policies and this has resulted in record buybacks year on year and a growing dividend culture (see Portfolio).

CCJI runs with a consistent level of net gearing around the 20% of NAV mark, in order to benefit from the long-term growth potential in Japan without having to time the market, and in order to boost the yield distributable to shareholders. This increases growth potential in rising markets and susceptibility to falling markets, although this is offset by the high quality and relatively defensive characteristics Richard looks for.

CCJI’s success is reflected in a narrow discount versus the peer group average, which is 3.8% at the time of writing. The trust has been awarded a Kepler Income & Growth rating for 2023.

We think CCJI is an attractive option for core exposure to Japan for both growth and income investors. The focus on quality companies which can compound their cashflows at attractive rates should lead to steady long-term growth. Meanwhile the dividend growth prospects appear excellent given the ongoing corporate governance reforms which have seen the dividend culture transformed. Richard has a very clear strategy when it comes to stock selection, and has been consistent in implementing it. We think this contributes to it being an attractive buy-and-hold investment, and investors can be confident the trust will continue to behave as expected. It is worth bearing in mind that style won’t always work in its favour, as markets can go through periods of rewarding extreme growth or value. However, in our view, the focus on quality, attention to valuation and centrality of dividends will likely appeal to many investors looking for a long-term investment.

Some investors will have no or little exposure to Japan. We would argue that the outlook is as bright as it has been for many years, with the corporate governance reforms seemingly bearing real fruit in terms of buybacks and dividends as well as companies focussing more on earnings growth-accretive activity. The economic picture is also interesting. Japan looks likely to finally escape the zero-interest rate trap, with modest inflation being welcome. Of course, it cannot escape any global downturn if one emerges, but given the endogenous drivers, we think Japan is a relatively attractive place to invest at this juncture.