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ZENNOR JAPAN EQUITY INCOME FUND: Japan specialist that’s thriving by following legal guidelines of Warren Buffett

Fund manager James Salter believes it is a good time to be an ‘off-piste’ investor – someone who does not follow the herd.

Like many investment experts, he is concerned that the US stock market is currently priced ‘to perfection’ – fully valued – and could come crashing down if President-elect Donald Trump’s measures to stimulate the US economy don’t work their magic.

Salter, who founded boutique investment house Zennor Asset Management in 2020, says: ‘You could argue that the big US tech companies represent a special situation because of their involvement in Artificial Intelligence (AI).

‘But the investment risks are significant, especially if the positive economic growth story that Trump is telling us about fails to materialise, leading to a wider global economic slowdown. All stock markets would then suffer.’

Although Salter accepts the two funds he and co-founder David Mitchinson run – Zennor Japan and Zennor Japan Equity Income – would not escape any such correction in global equity prices, he believes their eclectic composition would make them more resilient than many other investment funds.

‘I’m a big believer in US investor Warren Buffett,’ he says. ‘Preserving our investors’ capital is crucial, so I never forget Buffett’s two rules for successful investing. Rule one: don’t lose money. And if you ask about the second rule: don’t forget the first.’

Both funds are underpinned by these two ‘rules’, but Japan Equity Income is the more conservative.

Its modus operandi is very much based on identifying off-radar Japanese companies which have massive amounts of cash sitting on their balance sheets – and then gently persuading them to use some of that cash to either pay dividends to shareholders or buy back shares.

‘I call it off-piste investing,’ says Salter, ‘and it’s a provider of steady investor returns.’

The performance numbers prove this. Since its launch in spring 2023, Japan Equity Income has generated total investor returns of 19 per cent – better than the average Japanese fund over the same period of 17 per cent.

Fishing for minnow cash-rich Japanese companies is not something most Japanese fund managers are prepared to do. But Salter and Mitchinson, with 60 years between them of running Japanese funds, thrive on it.

‘Between us, we go out at least six times a year to Japan to visit companies,’ says Salter. ‘We also have advisers both here in the UK and Japan searching out ideas – and we do a lot of screening of Japanese stocks to identify potential winners.’

Japan Equity Income, a £125 million fund, is invested in 42 stocks. Castings and civil engineering company Kurimoto, a top 10 holding, is typical of the businesses that the managers seek out – cash-rich with little coverage from market analysts.

‘We’ve been to see the management a couple of times,’ says Salter, ‘and we hold virtual meetings with them on a regular basis. Slowly, but surely, we’ve encouraged the company to shrink its balance sheet. You could say it is a boring business in slow growth mode, but it’s providing us with a dividend equivalent to 5 per cent a year – and the prospect of more to come.’

Zennor has about £800 million in assets under its belt and has no desire to widen its investment focus outside of Japan. ‘If we ran other investment strategies,’ says Salter, ‘we would end up as a jack of all trades, but master of none.’

The fund is on most investing platforms and its annual charges total 0.92 per cent.

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