Active ETFs Cash In on Corporate Reform in Japan

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 on 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.

Japanese Stocks Have More Room to Raise Valuations