CC Japan Income & Growth (CCJI) has published annual results for the year ended 31 October 2024, which show that it has provided NAV and share price total returns of 16.1% and 13.2% respectively, whilst the TOPIX has returned 13.4%. Discount widening over the year means that CCJI’s share price is effectively in line with the TOPIX, while the NAV is ahead (all figures in sterling terms). This effectively extends CCJI’s long term record of outperforming the TOPIX since launch.

From its inception in 2015 to 31 October 2024, CCJI has returned 152.5% on a NAV total return basis, and 126.7% in share price terms, comfortably ahead of the TOPIX total return of +100.6%. CCJI’s chair, June Aitken, says that this long-term record “of high absolute returns and outperformance of the Index attests to the Investment Manager’s skill in identifying companies paying income to shareholders whilst still offering strong growth potential”.

Discount widened over the year

Over the year to 31 October 2024, CCJI’s discount widened from 6.9% at the beginning to 9.4% at its close. (2023: 6.9%). Aitken says that, whilst this outcome is disappointing, it is comparable with the experience of the company’s immediate peers, although the company has maintained the narrowest discount to NAV in the peer group. She adds that the board will consider buying back shares to manage the level and volatility of the discount, if it is judged to be in the best interests of shareholders to do so.

Revenue income and dividends

CCJI does not set a specific yield target but is committed to providing a progressive dividend with the board aiming to increase dividend payments annually. CCJI has been able to do this since launch and this trend has continued this year. However, with a 0.9% decrease in revenue return to 5.32 pence per share, this has required CCJI to utilise a small amount of distributable reserves.

CCJI paid a first interim dividend of 1.60 pence per share on 2 August 2024 and the board has declared a second interim dividend of 3.85 pence per share, bringing the total dividend for the year to 5.45 pence per share, an increase of 2.8% over last year and representing a yield of 3%. The second interim dividend will be paid on 3 March 2025 to shareholders on the register as at 31 January 2025, with an ex-date of 30 January 2025.

Continuation vote

CCJI offers shareholders a continuation vote every three years. The last continuation vote took place in 2022 and so a continuation vote will be put to shareholders at upcoming AGM. CCJI’s board says that, given the trust’s long-term performance and returns, it “has no hesitation in recommending to shareholders that they vote in favour of the Company continuing as an investment trust for a further three-year period”.

Investment manager’s report – performance review

“The net asset value (“NAV”) cum-income total return of the Company rose by +16.1% in sterling terms over the year to 31 October 2024. This return outperformed the rise of the TOPIX, which returned +13.4%. Yen weakness has been a notable feature of the year under review and cause of volatility in the latter months. However, the aggregate increase in sterling terms continues the strong record of total return of the Company since inception, which we believe confirms the importance of shareholder distributions as a component of total return in any long-term investment strategy for Japanese equities.

“In several ways, nothing has changed over the last twelve months while in others, prospects currently appear very different. Global monetary policy and geopolitical tensions remain prominent considerations for investors and, for anyone with an interest in Japan so does the impact that these have on the foreign exchange market. However, Japan is emerging from decades of deflation and the transition to an inflationary era is creating many new challenges and opportunities for companies and consumers.

“The Governor of the Bank of Japan, Kazuo Ueda, continues to indicate a path of ‘normalisation’ for domestic interest rates. Following on from the ending of the negative interest rate policy (“NIRP”) in March, a second increase in interest rates was announced in July with expectations of further rises to come if the economy maintains its favourable trajectory with regard to wages and inflation in particular. Interest rate sensitive sectors featured prominently in the major positive contributors to performance during the period. Holdings in the banking (Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group) and insurance (Sompo Holdings, Tokio Marine Holdings) sectors performed strongly throughout the year as the improving operating environment resulted in an immediate benefit to financial performance. With clear targets to balance growth, capital efficiency and shareholder returns, the operating improvement led to an attractive combination of dividend increases and share buybacks.

“The largest contributors to performance were Zozo and Hitachi. Zozo is Japan’s leading on-line fashion retailer which has benefited in recent years from improved corporate governance. More recently its business model has delivered the sustainable cashflow that will allow it to continue to enhance its shareholder returns consistently. Hitachi, a large business conglomerate, has undergone a major operational restructuring and rationalisation rendering it almost unrecognisable from the company it was 20 years ago. Its success has been increasingly recognised by investors.

“The most significant factor in the list of detractors from performance was the Company’s underweight allocation to large capitalisation stocks. Smaller companies generally lagged the performance of their larger peers which was a modest headwind for performance. Macnica, an electronics and software distributor, performed less well than anticipated during the year as demand suffered from a global inventory adjustment of key semiconductor components. The company maintained its commitment to shareholders with a dividend increase and share buybacks and remains confident in its market positioning and potential once business conditions improve.”

Investment manager’s report – portfolio positioning

“In our opinion, the renaissance of the Japanese equity market is now into its twelfth year. The persistence of the government, regulators and investors over this timeframe to change the corporate culture in Japan is having a notable impact on capital efficiency and corporate governance standards. We believe that these factors are the underlying dynamic which has supported the favourable investment return for equity investors through not only periods of economic prosperity but also uncertainty. Further initiatives such as the action by the Financial Services Authority to urge non-life insurers to sell their strategic shareholdings, revisions to the Stewardship Code and substantial changes to the TOPIX inclusion rules will all add greater urgency to the reform in the corporate sector.

“The Company is positioned to capture the exciting investment opportunities that are emerging in the Japanese equity market as a consequence of these changes. During the year under review, new holdings have been established in several companies whose appeal, most importantly, is based on their attractive long-term growth prospects. This remains a primary consideration for our investment strategy. In each case these prospects are supported by management policies consistent with an agenda of delivering sustainable improvements in capital efficiency and corporate governance.

“JAFCO is Japan’s leading venture capital investment business. The prospects for investment growth have been enhanced by government initiatives to promote a more entrepreneurial culture as well as the greater opportunities created by corporate restructuring and demography related business succession issues. The company is achieving a steady, sustainable improvement in capital efficiency through a redefined investment approach, stronger fundraising capabilities and an appropriate focus on returns to shareholders.

“Japan Securities Finance provides services to securities companies and financial institutions and is a vital component of the daily operation of financial exchanges in Japan. Its outlook is enhanced by the healthier securities market, lending conditions and new business initiatives. Returns are improving and this has been accompanied by recent initiatives to raise capital efficiency and shareholder returns through greater distribution to shareholders.

“Dexerials is a leading manufacturer of functional materials used in display screens and other devices. Advanced investment in R&D and facility expansion has positioned the company well for the next generation of technologies. The benefits of this forward-looking strategy are reflected in the form of an enhanced distribution to shareholders via dividends and share buybacks.

“The above purchases have been funded by a combination of reductions of established positions or entire disposals. The most significant activity has been the outright sales of holdings in Nippon Telegraph & Telephone and Orix. The former is due to a sluggish earnings outlook as the company balances the challenges of behavioural changes amongst consumers and its regulatory requirements. The latter was a decision based on valuation due to share price appreciation and is representative of the opportunities that are created during periods of market volatility. Similarly other holdings such as Mitsubishi UFJ Financial and Sompo Holdings were reduced after periods of strong share price performance.”

Investment manager’s report – outlook

“We believe that Japanese equities continue to offer a compelling investment opportunity despite the strong performance of recent years. With even greater encouragement from the government, regulators and shareholders, Japanese companies are adopting ever higher standards of corporate governance and implementing more attractive capital allocation policies. This is creating a favourable environment for investors in which significant opportunities to generate a total return, based on capital growth and compounding shareholder distributions, are achievable.

“Japan has remained on the periphery of investment decisions for foreign and domestic investors alike for several years, but we believe this is changing. The more attractive investment landscape has encouraged heavy participation from international private equity investors seeking the cheap valuations on offer. Increased participation in the market by domestic investors is a particularly notable feature, following the revamp of the Nippon Individual Savings Account (“NISA”) savings programme, and recognition that companies are delivering an attractive return profile for long-term investors. Our optimism in the outlook is increased by the fact that the investment opportunity created by corporate developments now coincides with signs of improving domestic economic fundamentals and the potentially significant positive benefits to Japan of the global geopolitical realignment.”