Value investors look for companies whose shares are trading at less than their fundamental value. In the past, fundamental value tended to be a few times more than the recorded worth of physical assets such as factories and stock. Increasingly, it includes other things of value, such as the company’s brand strength, or the patents for its inventions. So far, so simple.
However, in some parts of Asia, a curious pattern has emerged. Shares in many companies are trading at prices below the book value of their assets – and have been for some time. This isn’t because the companies are inherently worse than those listed in the US, UK and Europe. Instead, a key reason is the corporate culture in some economies.
Over the last year, governments in two of those economies – Japan and South Korea – have taken steps to address this issue. Economists often argue that a healthy stock market is essential for a healthy economy, which gives these governments a clear incentive. Indeed, it is a debate that is alive in the UK too.
In 2023, the Tokyo Stock Exchange asked all listed companies to introduce policies focused on improving profitability, their long-term returns and their valuations. Meanwhile, last week the Korean Financial Services Commission introduced its “Corporate Value-Up Programme”. In the announcement, the Commission said:
“Above all, the government will pursue raising the Korean stock market attractiveness by improving shareholder returns and weak governance structures. To this end, specific measures for the ‘Corporate Value-Up Program’ will be announced this month, aiming to encourage companies to proactively enhance their corporate value.”
Notably for Henderson International Income Trust investors, both the Korean and Japanese authorities are encouraging companies to pay higher dividends to shareholders.
We often say that it is important for value investors to have patience. It can take months or years for a company’s stock market fortunes to significantly improve. But, dividends make being patient easier. They essentially pay investors to wait for returns from increased share prices.
The cultural change in Asian business is on its way. Dividends have risen in the region in recent years. In Hong Kong and Korea, some companies still controlled by their founding families have introduced dividends and share buybacks before policy was changed, with owners sick of their low valuations. Successful value investing starts with someone acting to reverse a company’s fortunes. We will take that in whatever form it comes.
At the moment, Asia-Pacific stocks make up almost a quarter of HINT’s portfolio. Meanwhile, our holding in Korean insurer Samsung Fire and Marine was the top contributor to our performance in January.
To find out more about Henderson International Income Trust, click here
Glossary
Dividend
A variable discretionary payment made by a company to its shareholders.
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Portfolio
A grouping of financial assets such as equities, bonds, commodities, properties or cash. Also often called a ‘fund’.
Disclaimer
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