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Japan equity star says balance sheets are ‘too healthy’

Japan equity star says balance sheets are ‘too healthy’

Japanese companies remain reluctant to release large amounts of pent-up cash and balance sheets in the country are actually looking ‘too healthy’ in some circumstances, Citywire A-rated Max Godwin has said.

Singapore-based Godwin, who runs the Eastspring Investments-Japan Smaller Companies fund, said shareholder engagement continues to be a slow process, despite demand for improvements being continually pushed by the Japanese government.

Godwin – while not as critical as some of his investment peers – said the Japanese culture could not change overnight and highlighted areas where improvements were coming through.

‘The problem we have encountered is that very cash generative businesses tend to pile up that cash on the balance sheets. There are companies with big market share and having a big market position with very little potential to grow within their segment.

‘However, they don’t necessarily feel comfortable putting cash to work through acquisitions, for example, so the cash builds up and builds up, so they are, in a sense, too healthy,’ he said.

Godwin said that historically, companies have been happy to let the cash build up rather than undertake buy backs or pay dividends or look at M&A activity.

‘We are starting to see some changes in this from companies, particularly around shareholder engagement, which is encouraging and improving. The rates of pay out are improving and return on equity is improving as well, but more could be done.

‘The overall picture is one of improvement, whether that is return on equity or pay out as a percentage of profits, but for stock-pickers it is very much case-by-case and you need to find opportunities that may not be pricing in improvements here, that is something to watch out for.’

Sector call

Godwin previously championed his exposure to autos, which remain an overweight in the fund, despite at a lower level than the 5-6% levels seen last summer. ‘We own about six stocks in that area and we have trimmed quite a lot because of outperformance we have experienced.’

The Eastspring Investments-Japan Smaller Companies fund returned 48.8% in Japanese yen terms over the three years to the end of September 2017.

This compares to a 42.5% rise by its Citywire-assigned benchmark, the Russell/Nomura Mid Small Cap TR USD, over the same period.

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