CONTRIBUTORS
Grace Su
Managing Director, Portfolio Manager
Jean Yu, CFA, PhD
Portfolio Manager
Preview
Japan has made significant strides in enhancing its corporate governance practices. Through both government initiatives and new regulations from the TSE, Japanese corporates have been strongly encouraged to improve corporate financial performance, which has invited greater shareholder engagement and entailed improving integration of sustainability issues. As a result, a flood of share buybacks and dividends, greater activist involvement and a surge in M&A activity are revitalizing interest in the Japanese market and propelling it to new all-time highs.
Key takeaways
- A new emphasis on corporate governance has helped to revitalize the Japanese market by improving corporate profitability and enhancing shareholder engagement and sustainability disclosures.
- These initiatives have begun to change the ways Japanese companies do business as share buybacks, activist engagement and M&A activity—once frowned upon—become more common.
- We believe these catalysts are only the beginning of a movement toward greater profitability and higher valuations for Japanese companies, creating compelling opportunities for long-term value investors.
We believe we are still in the early innings of true structural reform in Japan. Sustainably improving financial returns and capital allocation is a long and difficult transformation. Japan is a conservative society that prioritizes social harmony, and thus change will occur at its own pace in a way that is acceptable to its culture. The interesting thing about a consensus-focused culture, however, is that once the tide shifts, the whole country is likely to follow en masse.
Three decades of deflation have created a defensive mindset in Japanese corporations where they prioritized cash, protected jobs and fended off foreign threats. As the country emerges from this defensive posturing, there are many opportunities for value creation through governance improvement that we believe will offer strong sources of portfolio alpha generation.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.