Equity Strategies

Japan Dividend Equity

The strategy’s focus is not solely on the current level of dividend yield but also on dividend growth potential. The strategy aims to deliver stable total returns from both income and capital gains.

Investment Philosophy

Dividends serve as indicators that encapsulate company fundamentals such as earnings potential, financial strength, and management strategy. Dividend yield is therefore an effective factor for long term investment. The strategy’s focus is not solely on the current level of dividend yield but also on dividend growth potential.

Through bottom-up research, the investment team evaluates a company's competitiveness, cash generation potential and business strategy. The strategy aims to deliver stable total returns from both income and capital gains.

Focus on dividend yield and dividend growth potential

The strategy invests in competitive companies paying high dividends. Competitive companies have cash generating ability - the question is how the cash is utilized. Superior management teams balance investments and shareholder returns to create a virtuous cycle of cash flow generation.

When assessing a stock’s dividend growth potential, the focus is on a company’s ability to generate cash, the source of dividend payouts. Some key attributes the investment team looks for are a strong business model, efficient management, and sound financial conditions. A strong emphasis is placed on direct contact with company management. Through interactions with the senior management, the investment team seeks to determine the company’s competitive edge, generation and uses of cash, and stance towards shareholder returns.

Established investment team with robust research platform

Toshinori Kobayashi is the team leader of the Research Active Management Team and lead portfolio manager for the strategy. He has over 28 years’ industry experience with extensive background in value, growth, small cap, and thematic portfolios.

He is supported by Nikko AM’s robust equity research platform. The centralised research effort, consisting of a team of experienced analysts, has strength across all sectors, market caps and styles and a strategist with over 30 years’ industry experience.

Key Characteristics

01

Focus on Dividend Growth Potential & Yield

02

Identify Competitive Firms With Cash Generation Ability

03

Experienced Investment Team & Robust Research Platform

04

Concentrated Portfolio of Approx. 50 Stocks

Screening by Dividend Yield

The investment universe is put through a dividend yield screen, based on the 12-month forward dividend yield. The universe is narrowed down to stocks with above-average dividend yield. This step typically narrows the range to 400 – 500 stocks.

Narrowing via Bottom-Up Research

Among the stocks that currently have high dividend yield, potential investments are further narrowed down via bottom-up corporate research. The aim is to identify companies with potential to grow dividends and sustain a high level of dividends.

The focus of the research is in identifying high quality companies that are competitive and have the ability to generate cash flow. The following are examples of key attributes that the investment team looks for:

Strong Business Model

High market share
High value added goods & services

Efficient Management

High Capital Expenditure (CAPEX) efficiency
Efficient use of working capital

Sound Financial Conditions

Low financial leverage
High levels of cash reserves

Portfolio Characteristics

Approximately 50 stocks
High dividend
High quality bias e.g. high Return on Equity (ROE), low leverage
Low valuation bias e.g. low Price to Earnings Ratio (PER)
No bias towards low growth or utility stocks (despite common perception that high dividend portfolios have large exposure to such names)
Low beta and volatility

Investment Process

Featured Portfolio Manager

Toshinori Kobayashi

Portfolio Manager

Toshinori Kobayashi has served as team leader and portfolio manager of the Research Active Management team since 2010.

He began his career at Nikko Securities Investment Trust & Management (a predecessor of Nikko AM) in 1988 as a research analyst. He became a portfolio manager in 1992 and was subsequently promoted to team leader of the Market-Oriented Portfolio Management Team in 2003. He holds a B.A. in Law from Chuo University and is a Chartered Member of the Security Analysts Association of Japan (CMA).

Our Japan Equity Philosophy

To generate new growth, companies today must have a strong approach to ESG. By investing in the stocks of such companies, we believe that excess returns can be achieved over the medium to long term. The Japan Equity team aims to generate alpha by selecting companies with superior ESG practices through a stock selection process that combines both negative and positive screening, and an optimisation process that incorporates thorough risk management.

ESG Implementation

When we conduct a historical comparison between leading ESG indices and the TOPIX (Tokyo Stock Price Index), it is apparent that ESG indices do not always outperform the market. This implies that investing in companies with superior ESG ratings on its own is insufficient for outperformance. Instead, a well-conceived approach is necessary when implementing ESG considerations. As with any investment, appropriate stock selection and portfolio management are crucial to improve performance and control risk within an ESG strategy.

A Superior ESG Investment Process should:

Pursue alpha through a combination of financial and non-financial information, including ESG factors
Focus on ESG factors that lead to future earnings and strengthen competitiveness
Involve consistent engagement with corporate management teams

CSV Evaluations of Individual Stocks: Positive Screening

All active Japan equity investment strategies incorporate Creating Shared Value (CSV) evaluations, which take ESG factors into consideration. It is a comprehensive score that was developed by applying the CSV theory proposed by Professor Michael Porter of Harvard University. The score assesses how companies balance their engagement of ESG issues with the pursuit of profitability and competitiveness, in order to create value for both society and shareholders. Our analyst research has incorporated CSV evaluations since 2013.

Approach to Firms with Governance Risk: Negative Screening

Firms that have been involved in criminal conduct, fraud, and/or accounting fraud, or that have caused environmental or social problems, are classified as having governance risk. The Japan Equity team excludes firms with perceptible corporate governance risk from its investment universe, while also seeking to promote better governance by engaging with the firms it invests in.

Operational Flow for Handling Firms with Governance Risk

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