Jupiter Japan Income - seeking companies able to grow cash flow

Dominic Rowles | Mon 18 September 2017

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• Fund underperformed peers over the past year as its investments in large, high-yielding companies dragged on performance
• Dan Carter believes Japan’s ageing population will pose challenges for domestic consumption so the fund features little exposure to the consumer sectors
• We would like to see the manager establish a more consistent track record of adding value through stock selection

Our view

Dan Carter has managed the Jupiter Japan Income Fund since June 2016 and hired assistant manager Mitesh Patel in October 2016. Together they form a well-balanced team, which combines Mitesh Patel’s quantitative background and Dan Carter’s more judgement-based approach.

Our analysis of Dan Carter’s track record reveals he has delivered a lower return than the average fund in the sector and since October 2013. This incorporates his track record as lead manager of Jupiter JGF Japan Select, and the short time he has been at the helm of Jupiter Japan Income, although past performance is not a guide to the future.

We would like to see him establish a longer track record, spanning all market conditions, and accrue a more consistent history of adding value through astute stock selection before considering the fund for the Wealth 150+ list of our favourite funds across the major sectors.

Portfolio review

Dan Carter adopts a similar approach to that of his well-regarded predecessor Simon Somerville – he seeks companies with management teams that have a strong track record of reinvesting cash wisely to grow the business, or paying it out to shareholders as dividends. He is happy to invest in companies that offer lower yields, as long as there is scope to grow dividends.

Although this approach paid off for his predecessor over the long term, the fund has marginally underperformed its benchmark under Dan Carter’s short tenure so far, though past performance is no guide to the future.

Past performance is not a guide to the future. Source: Lipper IM* to 31/08/2017

Performance was held back over the past year by the fund’s large, high-yielding companies, which underperformed the rapidly rising stock market. Broadband provider and mobile communication company KDDI Corporation, for example, performed poorly which proved particularly painful given the company is one of the fund’s largest investments. Companies involved in the basic materials and oil & gas sectors performed well but the fund had little exposure to these areas.

Outlook

Dan Carter believes the willingness and ability of Japanese companies to increase dividends is growing, partly due to the country’s new Corporate Governance Code which aims to put shareholder’s interests at the forefront of corporate decision-making. This has already caused an increase in the proportion of earnings being paid to shareholders as dividends, and companies buying back shares at a premium to their market value, according to the manager.

Nevertheless, Japan faces challenges. Falling birth rates, increasing life expectancy and low immigration mean the country’s population is one of the oldest in the world. The manager expects consumer spending to fall as the population ages and therefore the fund has limited exposure to the consumer goods and services sectors.

He believes healthcare will become increasingly important in Japan as the population grows older, but this is widely recognised by other investors and many healthcare companies are currently overvalued, in his view. The fund’s healthcare exposure therefore focuses on a small number of investments that the manager believes to be attractively valued. This includes recent purchase Eiken Chemical, a market leader in providing blood tests. Their tests allow a user to screen for signs of colorectal cancer, which is prevalent amongst the older generations.

Please read the key features/key investor information document in addition to the information above.