Ian Cowie: new holding provides more diversification away from US

Many people say the most expensive words in the English language are “it’s different this time” but I beg to differ. This investor has missed out on more profits over the years by believing “it’s too late” and then failing to buy into trends that turned out to have had a long way left to run.

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Well, that’s my excuse for somewhat belatedly buying shares in an investment trust giving exposure to the world’s top-performing major stock market over the last year. No, I’m not talking about America’s Dow Jones, which has delivered a mediocre annual gain of 6% at the time of writing; or its wider-ranging Standard & Poor’s 500 index, which is up 12% on the same basis this Thursday morning; or even its technology-focused Nasdaq, which - despite recent wobbles - has soared 18% higher.

Nor am I talking about Britain’s FTSE 100, which also moved 18% forward over the last year; or France’s CAC 40, which is 11% higher; nor Germany’s DAX, which is 22% up. Regular readers should know that I already own investment trusts, or other shares, giving exposure to all the above.

No, I’m talking about Japan. Tokyo’s blue-chip stock market index, the Nikkei 225, has soared 27% skyward over the last year, despite recent rising tensions with China over Taiwan.

Such a sharp spike prompts obvious fears, shared by me, that I’ve left it too late. But I have bought shares in Schroder Japan Trust Ord (LSE:SJG) for several reasons that give me grounds for optimism.

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First, and most topically, last month’s election of Japan’s first female prime minister, Sanae Takaichi, raises hopes that fiscal reforms - including high public spending, cheap borrowing, and monetary easing - can be continued. These were originally introduced by her former colleague and Japan’s longest-serving prime minister, Shinzo Abe.

Takaichi’s pro-growth policies might permanently reverse Japan’s long-term problems of demography and deflation. An ageing population means more nappies are sold to pensioners than babies in Japan but fiscal stimulus could boost corporate profitability, which is the safest basis for rising share prices.

Against all that, despite gender-based comparisons between Takaichi and Margaret Thatcher, the former’s strategy of increasing the money supply will probably inflate Japan’s massive debts and might weaken its currency; the yen. Plus we have heard most of this before, when it was known as “Abenomics”.

Coming down from the clouds of macroeconomics, SJG is not the top performer in its sector over the last decade, five years or one-year periods. But it did deliver total returns of 140%, 86% and 25% over those periods, respectively. Better still, it did so while yielding 3.9% income that increased by an eye-stretching annual average of 18% over the last five years.

It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. Even so, income is a major attraction for this old boy, mindful of retirement, and aware of how difficult it is to find decent yields in Japan.

For example, JPMorgan Japanese Ord (LSE:JFJ) did best over the last decade, with returns over the usual three periods of 182%, 9% and 30%. But it yields only 0.9% rising by 6.2%.

CC Japan Income & Growth Ord (LSE:CCJI) led over five years with 95% but lacks a 10-year record, having been launched in December, 2015, and delivered 20% over the last year. It yields 2.5% rising by 3.9%.

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Meanwhile, Fidelity Japan Trust Ord (LSE:FJV) is the current sector leader with total returns over the usual three periods of 183%, 10% and 46%, but it yields nothing at all. Another consideration is that FJV’s short-term returns have been boosted by a proposed merger with AVI Japan Opportunity Ord (LSE:AJOT), the medium and smaller companies specialist, which will be put to a shareholders’ vote on 27 November.

AJOT has certainly done a lot better than my long-term holding in the Japanese smaller companies specialist Baillie Gifford Shin Nippon Ord (LSE:BGS). But that’s a different story for another day.

Returning to SJG, I draw comfort from its biggest holding being the electronics to healthcare and railway systems conglomerate, Hitachi, which was founded in 1910. Toyota Motor Corp ADR (NYSE:TM), the world’s biggest car manufacturer, is another top 10 holding. Asahi Group, another wide-ranging conglomerate, also features.

The latter is close to my wallet, and beer gut, as the owner of Fuller Smith & Turner Class A (LSE:FSTA)’s brewery in Chiswick, West London. This Cockney, born and bred, rather regrets to say that the beer - especially London Pride - seems to have got better since Asahi began brewing it in 2019.

Back to business, this international investor is keen to diversify away from America to some extent, after what has been a fabulous bull market or period of rising prices. While the past is not necessarily a guide to the future, my fears that it might be too late to invest in Japanese blue chips are also eased by the fact it took the Nikkei index more than 34 years to revisit its previous peak in 1989.

So, the current recovery might also be measured in decades, rather than months. Despite worries about China, there could yet be some way left to run in the Land of the Rising Sun. 

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Baillie Gifford Shin Nippon (BGS) and Schroder Japan (SJG) as part of a globally diversified portfolio of investment trusts and other shares.