Market conditions in Japan continue to suit CC Japan Income and Growth which has just reported an NAV return of 18.9% for the year ended 31 October 2023, well ahead of the 12.0% return reported on TOPIX, the benchmark. Shareholders got a return of 20.9% as the discount narrowed. Returns would have been higher but for an 8.1% adverse move in the yen/sterling exchange rate.

The dividend was increased from 4.9p to 5.3p and this was covered by earnings of 5.37p.

On 1 August 2023, Coupland Cardiff Asset Management LLP, the manager changed its name to Chikara Investments LLP. There are no plans at present to change the name of the trust.

Having narrowly missed out on raising money through its subscription shares last year, the board says that there are no plans to issue more. However, it is alert to opportunities to expand the fund through M&A. [First, though, it would probably have to eliminate its persistent discount, which despite narrowing, remains at close to 7%.]

The chairman Harry Wells is retiring at the forthcoming AGM. He had this to say “One summer’s day back in 2015, conversations with Richard Cardiff in a Wiltshire pub, led to the creation of the company. Coupland Cardiff, as Chikara were then, had astutely identified a very different investment approach to Japan targeting the potential of total return-growth with income – which still presents a compelling proposition. We were the first Japanese investment trust to launch for 25 years. It is gratifying to have been part of the project. Our original shareholders are now enjoying more than a 5% yield on their book cost. I would like to thank all those involved, particularly the board members past and present, for all their efforts and support. Hopefully, this is just the beginning of a new dawn for a Japanese market renaissance.”

Extract from the manager’s report

The Japanese equity market performed strongly in the twelve months to the end of October 2023. The portfolio was able to improve on the market’s overall performance. The standout performer has been the holding in Socionext in which a holding was established during the company’s Initial Public Offering in October 2022. For a number of years, we have been unable to identify attractive investment opportunities suitable for this mandate in an increasingly buoyant new listings market in Japan. However, Socionext, which was formed through the merger of system LSI (large-scale integration) businesses of leading Japanese semiconductor manufacturers, Fujitsu and Panasonic, listed on the Tokyo Stock Exchange Prime Market with the growth potential and the financial attributes required by the investment process. The newly listed shares performed well as the company exceeded initial operational performance expectations and its system on a chip (SoC) technology platform became increasingly appreciated for its potential in the area of Artificial Intelligence (AI).

April 2023 saw the retirement as Governor of the Bank of Japan of Haruhiko Kuroda, the architect of the experimental easy monetary policy that has made an important contribution to taming deflation in Japan. Before his departure, in December 2022 he announced the first signs of a reversal of the progressively easier policies introduced over the last 10 years. By expanding the range of yields tolerated under the policy known as Yield Curve Control (YCC), he paved the way for his successor, Kazuo Ueda, to steadily adjust monetary policy towards more normal conditions. This has had a favourable impact on the share price performance of companies in the financial industry. Leading banks Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group, which have been long standing holdings in the portfolio on the basis of the steadily improving business performance and returns to shareholders, received a significant boost to their share prices. Other financial company stocks such as SBI Holdings (broad range of financial services) and JACCS (consumer credit) also performed strongly.

Despite the uncertain economic outlook, some of the top performing sectors over the past twelve months have included cyclical beneficiaries such as iron and steel, marine transportation, construction and automobiles. These are industries where this portfolio has little exposure as the key attributes of the investment strategy – long-term growth and consistent returns to shareholders – are not evident in their past performance, or likely in the future under current operating conditions. While it can be frustrating at times to observe share price rallies in the sectors in which the exposure in the Company is low or non-existent, it is an integral discipline of the process that we believe is important in generating the long-term track record of dividend progression and total return.

At an individual stock level, it is disappointing to have experienced the underperformance of Dip (internet job recruitment services) and Carta Holdings (internet advertising). While both companies have reiterated their commitment to shareholders through consistent dividends and share buybacks, it is apparent that corporate spending on business services has temporarily weakened as consumer facing companies contemplate strategies to pass on higher costs. These two companies remain leaders in their sector and can be expected to recover as corporate Japan adapts to the end of deflation.

CCJI : Another good year for CC Japan