The Tokyo Stock Exchange roars after more than three decades of silence. In recent weeks, Warren Buffett has increased his holdings in Japanese trading companies as the tide of cash flowing into
black rock
It is
The Japanese fund has reached new heights.
The enthusiasm makes sense. Japanese companies known for hoarding cash as a hedge against tough times appear to have shifted their cautious attitude and returning cash to shareholders.
An unprecedented 21.28 billion yen ($149 million) in dividends was paid out by the 225 companies in the Nikkei Stock Average in the fiscal year that ended in March, while buybacks of Shares hit a record 8 trillion yen in the same period, according to Dow Jones. Market data. Tiers are pint sized compared to in the United States, where S&P 500 companies paid out $557.83 billion in dividends and made share buybacks totaling $933.15 billion in 2022, but they have increased significantly over the past two last years. Dividends have increased by 51% since 2021 while redemptions have more than doubled.
And investors have reason to hope that the trend will continue.
Honda engine
(7267:JP) decided to pay a record ¥150 per share in the year ending March 2024. Citizen Watch (7762:JP) said earlier this year that it would buy back nearly 26% of its shares by mid-February, which involves a buyout. program worth 65.59 billion yen, the largest ever for a Japanese fiscal year, although
Mitsubishi UFJ Financial Group
(8306:JP), Japan’s largest lender, suspended takeovers citing uncertainty over bankruptcies around the world.
Buybacks and dividends typically drive stock prices up – Honda Motor stock rose 45% in the first half of this year, while Citizen gained 46% – but the people who run Japan’s main stock market in ask for more. Nearly 45% of companies in the Nikkei Stock Average trade for less than the value of assets on their books, compared to 5.2% of those in the S&P 500, so the Tokyo Stock Exchange is pushing for change.
He wants companies to raise their price-to-book ratios above one. While ratios below this level are synonymous with cheap stocks, they also imply that investors lack confidence in the prospects for growth and profitability. The TSE suggests investing in “research and development and human capital” as a way to improve the ratio. Buying back shares and returning capital through dividends could also help.
The exchange has not set a deadline for compliance, but the specificity of the goal, combined with the recent pace of change, has investors excited. Add a pinch of spending by travelers after Japan, one of the last Covid-19 holdouts, opened its doors in October, as well as companies offering higher wages to workers as prices rise in an economy long plagued by deflation, and you have a rally in one of the largest stock markets in the world.
The Nikkei has gained 27% since the start of the year, against 16% for the
S&P500
.
While still about 15% below the record high of 38,916 reached in December 1989, the market appears to be recovering. The index crossed the 33,000 mark this year for the first time in 33 years.
“It could be argued that there is an advantage to profits [and] for higher valuations in the future,” says Joe Nelesen, senior director of index investing strategy at S&P Dow Jones Indices.
Investors who lack the time or expertise to track individual Japanese stocks can take advantage of potential gains by using funds. With the help of Morningstar Direct, Barrons attempted to weed the US-based Japanese fund 25 options, selecting those with at least $200 million in assets, low expense ratios and no less than five years of track record. Five that looked attractive included both mutual funds and exchange-traded funds, as well as active and passive investment strategies.
The iShares MSCI Japan ETF (symbol:
EWJ
) is Japan’s largest equity fund with $13 billion in assets, with $1.6 billion added in June so far, the largest monthly net inflow since October 2018. The passive fund, which tracks the benchmark MSCI Japan, is focused on large caps. Industrial and technological companies such as
Hitachi
(TYO: 6501) and
Sony Group
(TYO: 6758) represent more than 40% of the ETF.
ETF Industry Leader BlackRock (BLK) Offers iShares MSCI funds, at an expense ratio of 0.5%, which is relatively low for Japan category, although cheaper alternatives are available.
The fund, after fees, was down 18% last year, but gained 2.8% annualized over five years and 4.9% annualized over 10 years. period. Returns would have been better had it not been for the movement in the dollar-yen exchange rate. gain of the iShares Currency Hedged MSCI Japan ETF (
HEWJ
) is 10%, about three times better than for the unhedged fund.
Investors might prefer the $2.5 billion
WisdomTree
Japanese Equity Hedged Fund (
DXJ
), which increases by 12% per year on an annualized basis of 5 years and by 10% over 10 years. The fund is geared more towards companies that pay cash to investors than its competitors, with a dividend yield of 5.1%, compared to around 3% for iShares ETFs, which is the average for the broader category.
“The big dog in this space is actually WisdomTree’s DXJ,” says Dave Nadig, ETF expert at VettaFi, a provider of data and analytics for industry. “He wins hands down in most performance periods.” The fee is 0.48%, which is what iShares ETFs charge.
The cheapest fund on screen was the $1.3 billion
Franklin FTSE Japan ETF
(
FLJP
), which launched in 2017 and has an expense ratio of 0.09%. The fund holds large and mid-cap Japanese stocks and has generated an annualized return of 3% per year over five years.
At the other end is the actively managed Matthews Japan Fund (
MJFOX
), which costs investors 1.05% of their investment each year. It provides investors with diversified market exposure, with an 8% weighting in small-cap companies and 20% in mid-cap companies at the end of March. The fund is up 0.8% annualized over the past five years and 6.1% over 10 years, likely supported by the small cap category, which has been one of the fastest growing segments of the Japanese market. 10-year outperformers through February, according to Morningstar.
Japanese small caps are less liquid, more volatile and are also more sensitive to the economic outlook, allowing them to benefit from improving conditions. Dimensional Fund Advisors’ $259 million DFA Japanese Small Company I (DFJSX) focuses on such companies.
Launched in 1986, making it the oldest of the group, the fund has an expense ratio of 0.4%. It’s down 1.2% a year on a five-year annualized basis, but has returned 5.6% on a 10-year annualized basis for investors stomached for its risk.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com