Why Japan’s problems could be solutions for investors
For three decades Japan has experienced bouts of deflation and persistent weak growth. And, on the...
Japan boasts one of the highest concentrations of large family-run businesses on the planet. At the start of the 21st century, one third* of all Japanese listed companies had some kind of family control and that remains the case today, according to Richard Kaye, co-manager of Comgest Growth Japan.
Richard says that investors should pay close attention to these businesses, perhaps
more than they do at present. “We have observed many cases globally when family or founder-owned or run companies align well with shareholders’ interests,” he said. “And in Comgest’s Japan portfolio we take that idea quite far.
“Simply put, we view these companies as having a ‘Day Zero’ mentality which translates naturally to capital discipline with a long-term mindset, through the pursuit of unique businesses. These are start-ups which grew old. They speak the language of the shareholders because they are run by a major shareholder. With not just skin, but blood sweat and tears in the game, they certainly seek returns but importantly, they also seek long-term survival.
“About one third of our holdings and, in our opinion much of the fund’s long-term outperformance, is from companies which fit that definition.
“For example, Obic is one of Japan’s leading business software providers and the country’s answer to Oracle for small companies. Since its creation in 1968 by Masahiro Noda, (who remains Chairman and 23% holder) it has insisted on keeping all operations home-grown: no sales agents, no mid- career hires. “We are like the Chairman’s children”, say Obic staff. That may sound odd in the West, but it has created a consistent and reliable service provider in corporate Japan, which is heading Japan’s software solutions to address its labour shortage”.
Japan is not the only region where family-ownership is seen as a good thing by investors. Chris McGoldrick, deputy manager of Stewart Investors Asia Pacific Leaders, says his fund also has a focus on these companies.
“We like family businesses as there is positive alignment – in the portfolio we are trying to preserve capital and grow it for future generations, which is exactly what families are trying to do with their businesses.
“About 65% of Stewart Investors Asia Pacific Leaders is invested in these companies – that’s compared to just 17% of companies that are family-owned in the MSCI Asia Pacific ex Japan index’s top 50 stocks.
“These businesses tend to be looked after, less indebted and more conservatively financed, so today especially, they are more resilient. They also tend to have more respect and appreciation for employees and the community around them. Mahindra Mahindra is an example. During the pandemic, its owner dedicated resources to the manufacture of ventilators, using his most talented engineers.”
Of course, it’s not always plain-sailing. As with all families, arguments can occur and Chris sites the famous example of the Ambani brothers in India. After the death of their father – the founder of Reliance Industries – in 2002, the two brothers had a bitter feud over who should run the business and minority shareholders suffered.
From defamation suits, letters to the prime minister, and dragging each other to court, the once-close brothers did it all. In the end, their mother brokered a de-merger, giving one son control of oil and gas, petrochemicals, refining and manufacturing, while the other got electricity, telecoms and financial services.
Richard Sennitt, manager of Schroder Asian Income, also likes family-owned businesses. “Families tend to take a longer-term outlook on the businesses, which is a positive thing,” he said. “They think strategically, long-term and about the sustainability of the business, rather than just about maximising short-term profitability.
“By and large, family shareholders also have an important desire to make the business successful and like to be able to take an income from it themselves in the form of a dividend. So, for income-investors, this can make for a relatively attractive payout.”
Perhaps surprisingly, some of the largest companies in Europe still have significant family-ownership too. Bernard Arnault became the majority shareholder of LVMH Moët Hennessy – Louis Vuitton in 1989, creating the world’s leading luxury products group. He has been Chairman and CEO of the company since that date and his daughter Delphine is now executive vice president of Louis Vuitton, and a member of LVMH’s executive committee. The Arnault family owns a 47.44% stake in the company (as at 31 December 2019).
Swiss pharmaceutical company Roche is also owned by the descendants of Fritz Hoffmann-La Roche, who founded the company in 1896. Scion of the family André Hoffmann is the current vice chairman and members of his family are part of a shareholder group with pooled voting rights of some 45% of the company.
George Cooke, manager of Montanaro European Income, fishes further down the European company capitalistion pool – mainly in small and medium-sized companies -but here, too there are many family-owned businesses that appeal.
“It really boils down to how the businesses are managed,” he said. “Often family-owned businesses are still run by the founder who, by definition, will have a successful track record. Moreover, they often take a much longer term view than a more ‘corporate’ management team might – they are thinking about, and focusing on, where the companies will be a generation from now, not whether the next quarterly earnings per share will be higher or lower than consensus. This both aligns to our investment horizon and also, we believe, reduces risk of things like underinvestment or succumbing to disruptive technology shifts.
“I should add though that it’s not always the case. Sometimes you can find businesses that are used by 3rd or 4th generation family members as a cash cow or piggy bank. Here the opposite can apply! They can be run by people with little relevant experience and/or face chronic underinvestment as the family insist on all the cash generated being paid out in a dividend. Being selective is therefore key!”
*From 1962-2000: source Financial Times, How Japan’s family businesses use sons-in-law to bring in new blood