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McClatchy-Tribune  08/23/2014 11:59 PM ET
New index is rising to challenge [Daily Mail, London :: ]

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Aug. 23--There's a new stock market index in town -- and in the desperate scramble to be listed, companies are improving the way they treat their shareholders.

The Japan Nikkei 400, launched in January, is the brainchild of a government keen to promote better corporate responsibility.

To make the cut, businesses have to meet stringent criteria.

First, they must have been listed on a stock exchange for at least three years -- and they can't have reported operating losses.

They are then ranked on market capitalisation, return on equity, disclosure of earnings information and whether they have independent directors.

The top 400 businesses make the cut. It means that in order to qualify companies need to be run for the benefit of their shareholders.

Machinery firm Amada failed to meet the criteria to be included in the index because of low return on equity how much profit backers get for their investment.

It promised to shape up by returning all of its net profits in 2015 and 2016 to shareholders.

Amada's share price jumped more than 15pc on the news as investors' appetites were whetted by the firm's landmark move.

Hiromichi Tamura, chief strategist at Nomura bank in Japan, says: 'When it was first introduced, many investors were negative and thought it wouldn't change anything.' But things have changed, he says, pointing to the transformation at Amada: 'It was notorious for being a conservative company which likes to hold a lot of cash on its balance sheet.'

William Davies, head of global equities at Threadneedle Investments, thinks the move marks the start of a huge change. 'It won't happen overnight but it is putting in place the measures to make very positive changes and that is enormous progress,' he says.

The index will be reviewed every August and companies that no longer meet the criteria will be thrown out.

Historically, investors in Japanese firms have suffered poor returns compared with other advanced industrial countries. Weak management has also hampered corporate expansion and innovation.

Tamura says: 'This index is unique. There's nothing else like it in the world and it is working.

'Japanese companies are getting proactive on shareholder returns. They are changing in terms of corporate governance.'

Performance-wise, the Nikkei 400 already threatens to outstrip the Nikkei 225, which investors have been following since 1950.

The new index has been tracking since August 30 last year, and went live in early January. Since last August, it has grown 17pc from 10,000 to 11,710. Meanwhile the Nikkei 225 has risen by around 13pc over the same period.

Companies currently on the Nikkei 400 include online marketplace Rakuten (similar to Amazon Marketplace), advertising firm Dentsu and beer manufacturer Asahi Group.

Not all those so far eligible for the new index look set to stay there, however. Sony's future within the Nikkei 400 hangs in the balance.

While the firm's insurance arm, which operates primarily in Japan, is doing well the rest of the business is not, according to Sarah Williams, manager of the Threadneedle Japan fund. The electronics side of the business in particular continues to struggle.

For UK investors, it is difficult to benefit from the progress of this new index. There are only two tracker -- or exchange traded -- funds that follow it at the moment and they are only on offer to customers in Japan.

As an alternative, UK investors can choose a Japan fund to put their money into.

The Legg Mason Japan Equity fund has been the standout performer in the sector recently. Over five years it would have turned pounds sterling 1,000 into pounds sterling 2,752.

It has more than a third of its money invested in the healthcare industry. Its biggest investments include pharmaceutical firm Sosei and discount retailer Don Quijote.

Holly Black was a guest of Threadneedle Investments at a conference in Tokyo

 

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