Head of Investment Fund Research
This has been a busy year for the fund research team in terms of overseas research trips. I went on my first ever Japan-focused research trip at the end of November, but the wider funds team has spent time in Zurich and Frankfurt on specific projects this year, as well as conducting its usual research trips to the US and Asia.
Having covered Japan for a couple of decades this was my first trip– less odd than it might sound given I have never recommended a local Japanese asset manager. Unfortunately, I have never found local Japanese managers to have the long-term view or correct set-up to produce consistent outperformance. While I have not been alone in that, this trip did represent something of a sea change in that I did find a new manager who I think will produce strong long-term returns, and whose fund will hopefully be added to our buy list soon.
This was a very rounded trip, meeting a combination of fund managers, companies, economists and market participants such as the Japanese Government Pension Investment Fund (GPIF). Some clear messages came out of that. First, no one is really jumping up and down about the Japanese market in the short term. ‘Fair value’ was the phrase I heard most. The cyclicality of Japan and its correlation to potentially slowing global growth, along with a recent rally, has left few willing to bang the table.
However, the key here is the long-term view. Improvement in corporate governance is hardly a topic that will get many readers excited, but in Japan it could be the catalyst for positive returns from the market somewhat regardless of the economic backdrop.
The challenge remains how to improve the economic performance of Japanese companies that often have excessive cash on the balance sheet, or unnecessary ownership of equity in the leading customers for example. The rewards are clear – companies that have been at the forefront have seen significant share price rises. Equally, there is plenty of low-hanging fruit to attract us as investors. I’d argue that taking an active rather than passive approach here is critical.
As investors, we should always be sceptical, and that was the belief I took to Tokyo – did this shift in mind-set really exist? Were fund managers really engaging with boards and how open were companies to those discussions?
Almost without exception, the feedback from on the ground was yes. One might argue that the stick rather than the carrot was the driver, with activists making most senior management very nervous, even if they hadn’t set foot on a company’s shareholder register. I found it interesting that there was evidence of companies pro-actively seeking advice on how best to tackle issues around corporate governance.
Japan is also attractive because of its often world-leading growth companies. There are few other countries where you could find Japan’s depth of expertise within the automation and robotics sector, and this expertise is likely to be increasingly in demand. Between 2013 and 2018, annual robot installations grew at a compound annual growth rate of 19% a year. While sales of industrial robots are expected to be flat in 2019, double digit growth is again being pencilled in for 2020-2022. Japanese robotics companies like Fanuc are on the right side of a long-term trend.
Equally within e-commerce and technology, Japan has its own suite of market leaders. It was interesting to hear that the latter group were most worried about the GAFA, the latest acronym for Google, Apple, Facebook and Amazon. They seem to be the bigger threat than domestic players.
So my key takeaways from Japan are as follows: first, buy Japan for the long term not for a tactical trade today. Second, corporate governance changes are real and happening on an individual stock basis and will drive returns regardless of the global economy. While there is less low-hanging fruit for the growth investor, there are some excellent companies trading at much cheaper multiples than those in the US. Finally, there is no question that this is a region where active management and active engagement makes the most sense.