Actively managed exchange-trade funds are set to launch in Tokyo next week, with one asset manager focusing its strategy on corporate Japan’s effort to elevate shareholder returns.
Simplex Asset Management Co., which will list three of six active ETFs that debut on the Tokyo Stock Exchange Sept. 7, has one targeting improvement in price-to-book ratios, another honing in on companies that can lower cross-shareholdings with affiliates and a third that backs firms whose executives have skin in the game with substantial ownership stakes.
The asset manager’s three choices underscore confidence that long-awaited change is underway in corporate Japan, which until recent years has been notoriously resistant to prioritizing the interests of shareholders. The shift has been an important driver in the surge of Japanese shares to a three-decade high, along with the return of inflation, the tailwind of a weak yen and global investors trimming their China allocations.
The average price-to-book ratio of companies in Japan’s benchmark Topix index is still just 1.25, versus around 3.78 for the S&P 500, providing scope to invest in companies with low ratios and agitate for change. This strategy has delivered returns of more than 310% since late 2006, compared with an increase of less than 50% in the Topix index, according to Simplex.
“When we’ve talked to companies about the need to improve their p/b ratios, they’ve often responded that this is just ‘Simplex’s opinion’,” Chief Executive Officer Hiromasa Mizushima said in an interview on Tuesday. They won’t be able to dismiss ETFs so easily, which speak for large numbers of investors, he said.
The Tokyo Stock Exchange said last year it planned to launch active ETFs as part of efforts to attract more foreign investors, boost volumes and remain competitive against global peers. Tokyo is behind New York, Hong Kong and other major bourses in offering these popular products.
Simplex, which has ¥1.3 trillion ($8.9 billion) of assets under management, aims to attract retail investors, who are clamoring for higher yielding investments as inflation in Japan starts to erode the value of savings in bank deposits.
Japan’s ETF market is worth about ¥64.7 trillion, according to Nomura Institute of Capital Markets Research, and until now has been made up of passive funds that typically adjust their holdings to track indexes.
Simplex hasn’t provided an exact figure for the target size of its active ETFs, but indicated its is in the hundreds of billions of yen.
Nomura Asset Management and Mitsubishi UFJ Kokusai Asset Management are also launching active ETFs on Sept. 7. Nomura’s funds will focus on high dividends and growth stocks, while the Mitsubishi’s offering targets high dividends.
Mizushima said Simplex’s second active ETF will invest in companies whose shareholdings in affiliates is more than 10% of its assets, and then lobby for this to be reduced. The logic is that holding stakes like this is a poor use of capital and the proceeds of the sales can be put to better use or returned to shareholders. It may change the 10% threshold depending on circumstances.
The third fund will invest in companies whose executives hold at least 5% of the shares and will encourage them to continue to align their compensation with performance for stockholders.
(Adds context on Tokyo lagging behind other bourses on ETFs)
