The Japanese Nikkei 400 index launched in the summer of 2013 to showcase the country’s most shareholder-friendly and best-run companies but how effective is this as a guide for fund managers?
The index was set up to review companies regularly based on a number of factors.
The first rebalance of the Nikkei 400 was carried out in August in a move which saw Japanese stalwart Sony Corp, the consumer-electronics maker that posted losses in five of the past six years, rejected as part of a shuffle of Japan’s profit-oriented stock index, while Panasonic Corp made the cut.
The government-backed Nikkei 400 also added 30 other companies, including Mazda Motor Corp, Daiwa Securities Group Inc, Seiko Epson Corp and Aiful Corp.
Video game manufacturer Capcom Co and Skymark Airlines Inc were among those being tossed out when the changes took effect on 29 August.
Inclusion in the index matters because investors, including Japan’s ¥126.6tn (£734bn) pension fund, use it as a benchmark.
The index picks Japanese companies with the best operating income, return on equity and market value and shames executives of those it excludes into altering their strategies in a bid to get back on board.
Kenichiro Ono is Japanese equity portfolio manager for passive strategies at SuMI trust. The assets under management of Japan equity passive were about US$86bn at 31 July. Ono says the launch of the index has had a positive effect on Japanese business culture.
He says: “The launch of the JPX Nikkei 400 incentivises Japanese companies with ROEs lower than global standards to improve their productivity.
“Consequently, the impact of this is a more prosperous and better performing equity market in Japan. As the index becomes popular among investors, many companies are declaring objectives to tackle issues of low capital productivities and in doing so are gaining market attention.”
Ono adds the fund’s investment in Nikkei 400 stocks encourages other companies to change their cultures in an attempt to make the cut.
But he says within the region conventional indices, such as the Tokyo Stock Price Index and Nikkei 225, remain the main guideline as larger companies allow fund managers to invest larger amounts.
“Through investment in the JPX Nikkei 400 we encourage companies to improve their capital productivities and management qualities. This in turn means increased contributions to the market as a result of enhancing a company’s global status and therefore potentially higher investment returns. However, conventional capital-weighted indices remain mainstream as they offer more superiority in the size of capacity as an investment vehicle.”
JP Morgan’s Yasuko Sato is a member of the asset manager’s London-based pacific regional group equities team and says stocks already on the Nikkei 400 are usually too expensive.
She adds that JPM looks to predict which stocks will end up on the Nikkei 400 in the future in an effort to generate as much upside on investments as possible.
“Because the Nikkei is essentially a historic reference to the quality of the company it is less use in terms of stock selection.
“What we are actually looking for is undervalued stocks that are improving to the extent they can enter the index in the future. That is where we see the growth going forward and generating returns.
“We are looking for discounted stocks with the probability to improve and the fact that a stock is excluded could make it more appealing to Japan fund managers.”
Neptune Japan Opportunities fund manager Chris Taylor says the index can be a useful guide as to which stocks are good quality but the basis for inclusions and exclusions appears to be somewhat inconsistent.
The fund currently has total assets of £389.9m.
He says: “It is a step in the right direction but I would not say it is a magic solution. What got people excited about it is that the index tends to examine returns on capital of stocks which is not necessarily something Japanese companies were bothered about in the past.
“Return on equity carries more weight. The reshuffle in August seemed a bit of a puzzler because Sony came out and Panasonic went in and it was not clear why they had done that.
“If you look at the performance of any of the Japanese markets they are not radically different. I do not really worry whether a stock is in an index, you should really be looking at whether a company stands on its own two feet or not.”
Investment Quorum chief executive Lee Robertson says: “It is a good idea in principle because everybody always wants to invest in stocks that are going to prosper, which is obviously highly likely if a company is run the right way.
“Whether or not such an index could become prevalent over here is hard to tell.”
Chelsea Financial Services managing director Darius McDermott says: “It is an intriguing development to base an index on the quality of the firms rather than on the traditional measure of size. It is doubtful that such an index would be needed in the UK, however.”