Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I invest with you?' I am Emma Wall and here with me today is Sara Whitley, manager of the Baillie Gifford Japan Trust (BGFD). Hello, Sara.
Sara Whitley: Hello, Emma.
Wall: So, there have been a number of changes in both the private and public sector in Japan, largely due to Abenomics. One of the arrows impacts has been on corporate governance within companies and it's something that's made you quite excited on the prospects for stock market, hasn't it?
Whitley: Yes, because we believe that the changes in corporate governance sort of see change in the whole way the companies think about themselves, how we should be governed, who the important stakeholders are and shareholders are definitely moving up the list. If they are not at the top, they are very nearly at the top and as a result, we're expecting improved returns from companies as they apply more disciple and improved dividends.
Wall: That's quite an exciting thing, improved dividends for any shareholders, because total return is such an important part of how you get gains.
Whitley: Yes, so dividends, historically, haven't been important in Japan, but their stock market yields are lot more than the bond market. You can – people can borrow at very little cost in Japan and I think Japan, because it's a nation of typically older savers does need income and that can be generated by companies focusing more on paying out dividends.
Wall: Which companies is this really affecting? Because we'd expect some of the larger more global stocks to already be applying this corporate governance, perhaps is it the medium and smaller companies that will need to pull up their socks?
Whitley: I think it's – there are two types of companies that will effect. One is the cash hoarders. So there's quite a few companies in Japan that have hoarders significant amounts of cash. Nintendo, for example, has over JPY1 trillion in cash on its balance sheet and they are being strongly encouraged to utilize that cash, so that should help improve returns. And the other ones are companies which have never really earned a decent return and I think management will feel that their jobs may be at risk, if they have failed to improve returns. So, it should be helpful, not really size of company but quality of company.
Wall: I know one of the other things that you think, or you predict, will drive the stock market is contrarian to a number of people’s view because the demographics of Japan don't seem to be supportive of growth. You have an aging population, fewer people entering the workforce to support those dependents. But you think actually this can be an opportunity for some companies in order to improve productivity.
Whitley: Yes, Japan now has a labour shortage, unemployment levels are low, we've seen increasing female participation in the workforce in the last couple of years and that – there is plenty of scope for that to continue to rise. We think the fact that people can't just go and do a traditional Japanese saying which is, hire hordes of people to sort out a problem will make them more efficient. We also hope that eventually companies will look at lower quality bits of their business and may decide that they need the people in the core business and they should get rid of businesses that they diversified in turn in previous years.
Wall: Because it's a fact that I didn't know until recently visiting Tokyo, that number of these large companies have so many strings to their bow. They have banks, they might make chips, they might do automation, they might do things for your home; and not all of those – you know, you can be a jack of all trade, master of none, if you take that approach.
Whitley: Yes, I think that's true with the big – they very big companies. They could all focus a lot more and improve their returns. So, yes, it should be quite exciting times in the next couple of years.
Wall: Sarah, thank you very much.
Whitley: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
