Japanese companies' recent embrace of shareholder value and return on equity is gathering momentum this year, adding an upside argument to the case more often made for Japanese equities that touts the defensive qualities an unloved market can offer global investors.
While still a distinct minority, some institutional investors have begun positioning themselves for a potential payoff as companies that had previously been content to hoard cash now return more of it to shareholders via stock buybacks and dividend payouts, and — of longer-term interest — display a greater openness to addressing shareholder concerns.
One example: Hartford HealthCare.
In fairly quick succession, the Hartford, Conn.-based asset owner has moved from a long-maintained underweight in Japanese equities in 2015 to a market weight the following year and then, in 2017, a significant overweight of 10% of its combined $3.3 billion in endowment and pension assets, said David J. Holmgren, the health-care system’s chief investment officer.
With a 7.26% weighting now in the MSCI All Country World index, Japanese equities would currently account for roughly 4.4% of a typical balanced portfolio with allocations of 60% to global stocks and 40% to bonds.
“Our thesis is that changes to Japan’s corporate culture are going to drive improved shareholder returns” for years to come, Mr. Holmgren said. The fact that foreign investors remained net sellers of Japanese equities over the past year in favor of U.S. stocks — where dividends and share buybacks have been buoyed by transient factors such as the big corporate tax cut in 2017 — has only “increased our conviction” that a rotation to Japanese stocks is just a matter of time.
Mr. Holmgren said Hartford HealthCare’s “anchor” allocations for that thesis, made in early 2017, were divided between Simplex Asset Management Co. Ltd., a local “friendly engagement” activist with ¥577.8 billion ($5.3 billion) in assets under management, and a core strategy newly set up by the Tokyo office of Boston-based Wellington Management Co. LLP.