Jeremy Glaser: You said about a quarter of your portfolio is in Japanese dividend paying stocks, but the yields of Japan are actually a little bit lower than it is in the rest of Asia. Why is that such a big concentration of yours with that lower yield there?
Jesper Madsen: I've been getting a lot of those kinds of questions, because, again, the obvious thing both from a macro perspective and from a yield perspective would be to exclude Japan. But as it happens, as bottom up investors, Japan is a large economy. You still have some of the best companies in the world at what they do. To give you some examples, if you are a Japanese company, you may not realize that your future growth may not only reside with what takes place in the US and in Europe, you've probably woken up to the fact that you have China right next door. So you start seeing cosmetics companies aggressively build a retail presence in China.
You have, again, baby products. If you have, as a Chinese household, some concerns about what goes into the manufacturing processes if you buy a Chinese made baby bottle, for instance, you may have some concerns. Is this safe? We had a milk scare in China a little while back.
These kinds of health concerns actually enabled this company to go and sell their products, a Japanese company sell their products, at a very substantial premium to locally manufactured goods.
That just shows you a couple things: that people are willing to pay for brand now in China, and they are willing to pay for quality. The ability to do so is there. These companies are seeing China is the fastest growing portion of their business.
Automation is another one, robotics. As you know, China overtook the US as the largest car market in the world last year. You're not going to assemble cars by hand. You're going to increasingly automate that to increase efficiency, productivity, but also to streamline quality control.
Again, that's where you have some of the Japanese companies that are the best in the world at helping build out the automation, basically the backbone of the manufacturing that takes place in China as well.
So while there may be obviously some I would say macro overhangs economically with the demographics, and so on and so forth facing Japan, GDP growth has already been very muted there for quite some time. The same thing for equity returns.
You can find those companies that they may be Japanese, but if you look at where they actually generate their earnings, their sales, and where their eyes are for the future as well that's where we are as investors it's squarely now on Asia and on China.
I should also say then for a dividend investor, while Japan is a lower yielding part of the universe, we focus on the ones that do pay dividends and the ones that have been growing their dividends as well.
I can tell you it used to be in Japan that you would be paid a fixed, set amount every year, no matter how the business did. That sounds very much like you are a debt holder, and obviously if you're a debt holder, you don't own the business. You're not a shareholder. The shareholder is the true owner of the underlying business.
But back in around 2004, 2005, we started seeing Japanese corporates actually go and put in place dividend policies tied oftentimes to a payout ratio, to how well the business was doing, to earnings.
Those again were the companies that we then chose to put in a portfolio with a dividend focus because again you had actually dividends in many respects grow faster than the underlying earnings, because at the whole for the market, for instance, dividend payout ratios would be in the low teens just a few years ago. Now it's sitting closer to 30 percent.
Just to give you a sense of how important that kind of shift in mentality, both from a corporate governance perspective, but also as a dividend yield and dividend growth seeking investor.
Glaser: Great. Thanks so much for talking with me today.
Madsen: Thank you.
Glaser: For Morningstar.com, I'm Jeremy Glaser.