The JPX Nikkei 400, the new Japanese index launched at the beginning of this year, has been a talking point across the world. Chanchal Samadder, head of UK sales, Lyxor ETF, discusses how it could fundamentally change the way investors allocate to Japanese equities.
IN September, Lyxor Asset Management launched an ETF based on Japan’s Nikkei 400 (JPX-Nikkei 400) – a new index constructed by factors other than by the market value of its constituent stocks.
The ETF is called the Lyxor Ucits ETF JPX-Nikkei 400. Chanchal Samadder, head of UK sales at Lyxor ETF, says the creation of the index was one of the big stories to come out of Japan this year. “The index itself is interesting because it’s the first core index we’ve seen that’s not a traditional market cap-weighted or price-weighted index, like the MSCI Japan or the Tokyo Stock Price Index (Topix).
“It’s moving into the world of fundamental indexing, so that’s why we think it’s a really interesting concept.”
Abenomics, the economic stimulus programme launched under the current Japanese prime minister, Shinzõ Abe, has drawn investor interest back to Japan, and its focus on better return on equity (RoE) by companies is reflected in the new stock index. The JPX-Nikkei 400 is made up of Japanese companies expected to deliver shareholder value. Measures such as efficient use of capital and good corporate governance set a standard that aims to provide investors with high quality exposure.
The JPX-Nikkei 400 contains 400 stocks chosen from across the Tokyo Stock Exchange, and it is reviewed annually to ensure that the components continue to be representative of the market. It has been endorsed by the backing of major institutions, such as Japan’s £737 billion (€935 billion) Government Pension Investment Fund, which adopted the index in April alongside its benchmark, the Topix.
The Lyxor Ucits ETF JPX-Nikkei 400 is available in euros on the Euronext Paris and in sterling and US dollars on the London Stock Exchange, and had assets under management of £96 million at the end of September. Investors have welcomed the new ETF, partly because its creation was motivated by their own recommendation. Samadder says: “We’ve had a really, really positive response. We were aware of the index and were talking about it internally, but it’s one of the products that was actually driven by client demand.”
He says that interest expressed by a number of UK and European clients drove Lyxor to pursue the new product with confidence. “These conversations happen from time to time, but it’s actually quite rare, that very firm demand driven by clients where they ask for a product to be launched.”
He adds that among Lyxor’s clients there is a strong base that believes in the success of Abenomics and the Japanese reflation trade, which has seen significant inflows into Japanese equities in the past two years.
Samadder says: “Abenomics has been quite controversial; fundamentally on Japan what we’re finding is that it splits opinions. It’s pretty 50/50; I think from the conversations that I’ve had half the clients are positive about Japanese equities, the other half are not. There’s no one who is neutral, or sitting on the fence.”
He says the Nikkei 400 is restoring confidence in Japanese businesses, by raising standards across the market as companies modify their corporate behaviour to enable them to compete for a place on the index.
“Historically Japanese companies have not really been good at returning value to shareholders either via dividends or buybacks.
“Now this new index, by its very construction, encourages Japanese companies to be or aim to be more profitable. I’ve heard one client tell me that effectively not being in this index is seen as quite shameful.
“We expect to see a lot of Japanese funds focusing more on their RoE. If you look at Japanese companies’ RoE relative to, say, US companies, it has historically lagged quite a lot, but actually over the last 12-18 months the gap has begun to close up. The Japanese return on equities is certainly increasing.”
Samadder sees more opportunities to come in Japan, citing client interest in Japanese buy-backs as an index, another focus that he says could encourage changes to corporate behaviour by pushing companies to return value to shareholders.
“We’ve had quite a few clients mention something like a Japanese buy-back would be quite an interesting concept. It’s not in our pipeline at the moment, but it is interesting feedback,” Samadder says.
Lyxor’s current product range includes an ETF tracking the Topix, which includes a currency-hedged share class to protect against the weakening yen. Samadder notes that Japan has been a key focus for currency hedged ETFs, gathering a lot assets and interest.
“We are now hearing from investors the need for currency hedged in other asset classes, for example European equities hedged back to sterling is a theme we’ve heard again a lot in the market, because of just the divergent monetary policy between the ECB and the Bank of England,” he says.
In general, Samadder feels clients are taking a more active interest in the ETF market. He says: “Over the last three of four years, as the use of ETFs has increased, we’ve seen clients becoming a lot more engaged across all aspects, including product design and ideas of what they want to see in the market.”
He explains that Lyxor will continue to communicate with clients on new opportunities, and pursue innovation when the climate is right. He says that clients have questioned the possibility of more esoteric products in Lyxor’s ETF offering, such as convertible bonds or European loans, but that limited liquidity in these areas means the firm would need to think carefully about these options before making any decisions.
He concludes: “Obviously we want to be innovative but be sensible about that innovation; we want to address client needs, rather than launching products for the sake of it.
“We want to see something that we believe is an investment theme that more than a few investors will allocate to; we certainly believe in innovation but it’s got to be innovation that ultimately delivers something valuable,” he adds.
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