TOKYO -- Older Japanese investors seeking income had a tough time last year as poor performance drove one-third of investment trusts offering monthly dividends to cut them, with many selling assets to pay distributions.
Monthly income funds have doubled over the last five years. Japan had some 1,400 at the end of 2016, according to fund tracker Mitsubishi Asset Brains. Their total assets topped 34 trillion yen ($292 billion), accounting for roughly 40% of the total in stock investment trusts. In all, 463 funds lowered monthly distributions last year as volatile exchange rates and persistent low interest rates hurt investment returns.
More monthly income funds, both in percent and absolute terms, cut payouts last year than in 2009, the year following the Lehman Brothers collapse, when 29% did. 2016 marked the highest on both counts in 10 years, and a second straight year of growth in the number of funds lowering distributions.
Monthly income funds targeting foreign high-yield debt had a particularly rough time. The first half saw the strong yen eat into the value of overseas debt, driving 111 funds -- about half of those in this asset class -- to reduce payouts. Similar cuts were made at 39% of emerging-market equity funds and 37% of EM debt funds.
Big funds, considered safe bets for monthly dividends, were no exception. Fidelity U.S. REIT Fund B, whose roughly 1.5 trillion yen in net assets make it one of the largest domestic investment trusts, lowered its monthly dividend from 100 yen per 10,000 shares to 70 yen in November. The fund sought to set a rate that it could pay stably over the medium to long term, Fidelity says.
Global Sovereign Open, a two-decade-old pioneer of monthly dividends managed by Mitsubishi UFJ Kokusai Asset Management, halved its payout to a record-low 10 yen in August.
Monthly income funds are popular among older investors seeking to pad their pensions with stable income. In fierce competition for customers, roughly 80% of these funds have sold assets to pay them, according to Nikkei group financial data provider QUICK. The Financial Services Agency is suspicious of funds that pay monthly dividends beyond their means.
Global Sovereign Open's net asset value dropped just over 3% in 2016 even when dividends were reinvested. While such funds are meant for medium- to long-term investment, holders are having a harder time reaping the gains they expected.
Stock prices have risen, and the yen has softened, in the "Trump rally" that took hold in November. But the investment outlook has grown increasingly muddy. So far this year, Asset Management One's Shinko US-REIT Open fund has lowered monthly payments for the first time in roughly four years. "The trend of cutting monthly dividends in line with investment performance seems likely to continue," said Nobuyuki Fujiwara, head of investment research at Deutsche Asset Management (Japan).
Payout cuts may even spur individual investors to pay closer attention to absolute returns and other aspects of funds besides how often they pay out. Investment options "will likely expand beyond monthly income funds" to yearly payout and other types, according to a senior consultant at Mitsubishi Asset Brains.