The United Japan Small and Mid Cap Fund is benefiting from the increased focus on shareholder value
Corporate governance reforms are a key driver of the current Japan stock market rally. It is not hard to understand why. Half of the companies listed on the Tokyo Stock Exchange (TSE) trade at a price-to-book (P/B) ratio of less than 1.0 times. Only 3 percent of firms listed on the S&P 5001 have such low P/B ratios.
More shareholder value
A P/B ratio of less than one generally reflects investors’ view that a company has low profitability and growth potential, and that the company is valued less than what its assets are worth.
To shore up investor confidence, the TSE made the call earlier this year for firms to focus on increasing their P/B ratios. Notably, companies that consistently trade below book value are now required to disclose their plans to improve capital efficiency. Companies have also been urged to boost their capital efficiency and profitability by reinvesting in their businesses.
In the short term, this has sparked a rush of share buybacks and higher dividend payouts as companies seek to increase shareholder returns. There are also longer-term plans to scale up research and development (R&D), invest in new equipment and facilities, and restructure their business portfolios.
Impact even greater for smaller companies
Smaller companies are reaping the benefits of this attention to improved shareholder value. Compared to their larger counterparts, they tend to trade under book value and lag in corporate governance standards and therefore potentially have more to gain from these reforms.
An example of such a company is FUKOKU Co Ltd (“FUKOKU”, not related to Fukoku Capital Management, one of UOBAM’s sub-managers). A leading manufacturer of wiper blade rubber products in Japan, FUKOKU has close to 100 percent share of this market domestically and 50 percent globally2.
Other business segments include the manufacture of hoses, dampers and mounts, medal components for trucks, and office automation products.
FUKOKU’s efforts are paying off
In 2020, the company begun full-scale corporate reforms with the intention of achieving a P/B ratio of 1.0 times. The company president is no longer a member of the founding family, structural changes have been instituted, and dividend payouts have increased significantly from 22 yen per share in 2020 to 55 yen per share this financial year.
As a result, FUKOKU has steadily increased its P/B ratio from 0.35 times in 2020 to 0.60 times3 today. Despite struggles in recent years due to production cuts and rising material prices, the company looks on track to grow its profits significantly from this fiscal year and its share price has already doubled since its low in 2020, with room for more upside.
Fig 1: Performance of FUKOKU, year to date
Source: Bloomberg, as at 15 August 2023
About the United Japan SMID Cap Fund (“the Fund”)
High exposure to Industrials and Information Technology (“IT”)
The Fund aims to achieve long term capital growth through investing in securities of small and mid-cap corporations listed, domiciled, or having substantial operations, in Japan.
Currently the Fund is focused on investing in Japanese companies that, like FUKOKU, are well-positioned to benefit from the corporate reforms and other structural shifts happening in the country. This includes companies showing improvements in human capital management, digital transformation, and productivity enhancement.
As such, the Fund has approximately 62 percent exposure to the Industrials and IT sectors4. In particular, the Fund focuses on domestic demand-led companies, namely:
- Human resource companies that provide staffing solutions for Japan’s ageing society
- Information Technology (IT) companies that provide systems integration, software development and cloud support to help Japanese corporates increase productivity and accelerate digital transformation
Above-benchmark returns
The Fund has shown a stellar outperformance of its benchmark over both the long and short term. In June 2023, the Fund (Class SGD (Hedged)) returned 7.32 percent, beating its benchmark by 5.43 percent5.
Fig 2: Outperformance of United Japan SMID Cap Fund over benchmark (%)
Past performance is not necessarily indicative of future performance. Fund performance is calculated on a NAV to NAV basis. Benchmark: MSCI Japan SMID Cap Index Source: Morningstar. Performance as at 30 June 2023, SGD basis, with dividends and distributions reinvested, if any.
Challenges ahead
Beyond low-hanging fruits such as share buybacks and dividend hikes, it remains to be seen if more Japanese small and mid-cap companies will embrace the longer-term reforms needed to better manage their capital allocations and drive up profitability.
Also, a weak Japanese Yen has helped to support exports, but any rise could put pressure on the stock prices of export-dependent Japanese firms.
Fund Details
| United Japan SMID Cap Fund, as at 30 June 2023 | |
| Sector allocation (%) | Industrials: 34.88 Information Technology: 26.89 Consumer Discretionary: 15.65 Materials: 7.41 Health Care: 5.04 Financials: 1.76 Real Estate 1.48 Consumer Staples: 1.16 Others & cash: 5.73 |
| Top 5 holdings (%) | JBCC Holdings Inc: 1.97 Seiren Co Ltd: 1.61 NSD Co LTdL 1.60 Meitec Corp: 1.58 Shibaura Machine Co Ltd: 1.56 |
| Fund class available | Class A SGD Acc Class A SGD Acc (Hedged) |
| Management fee | All Classes: Currently 1.75% per annum |
| Subscription fee | All Classes: Currently up to 5% |
| Minimum subscription / trading size | Class A SGD Acc / SGD Acc (Hedged): S$1,000 (initial); S$500 (subsequent) |
Source: UOBAM
1Source: CNN, Japan’s long-suffering stock market is back. This boom may have ‘staying power’, 24 May 2023
2Source: Sumitomo Mitsui DS Asset Management Company, August 2023
3Source: FUKOKU, Medium-term management plan, 30 June 2023
4Source: Source: UOBAM, as at 30 June 2023
5Source: Morningstar, Performance in SGD terms, on a Net Asset Value (“NAV”) basis excluding fees which an investor may or may not pay, with dividends and distributions reinvested (if any), as at 30 June 2023
If you are interested in investment opportunities related to the theme covered in this article, here is a UOB Asset Management Fund to consider:
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