After decades of stagnant growth and false dawns, Japan is traditionally seen as one of the most challenging economies to invest in with any conviction.
Therefore, it is always useful to get in front of a fund manager with almost thirty years’ worth of experience to help understand how the economy and stock market are evolving.
Chisako Hardie, who has been manager of Elite Rated AXA Framlington Japan since 2010, is a strong believer that, after two lost decades, corporate Japan has re-invented itself and is now giving rise to a host of new businesses.
Can you explain how corporate Japan has re-invented itself?
“Japan’s old model was to import material and mass produce consumer products overseas. It was a huge success – supported by the United States – and the currency remained weak between the 1960s and 1980s.
“Market difficulties began in Japan after the Berlin wall fell in 1989 – as the end of the Cold War saw Japan become less important to the United States. In addition, Japanese exports started causing frictions everywhere in the world – Japan was hated, and the bubble popped.
“Corporate Japan had to repair its balance sheets and sort out excess debt and labour. It took 10-15 years to do this but, during that time, it realised Korea had copied the Japanese business model also with great success– with companies like LG and Samsung replacing Sony and Panasonic.
“In reaction to this, Japan had to replace its ‘business to consumer’ model with a ‘business to business’ model. This means it no longer focuses on end products like televisions – but on production equipment instead. So while a TV might be Korean, the devices inside are very much Japanese. The result is the business side is doing well and many companies are achieving high earnings.”
Can you explain why the government has finally encouraged more women into the workplace?
“From a business perspective the Japanese population is declining, so we need to use national resources better. Women as a workforce were being wasted, particularly as many are educated with about 58% going to university. But not many have high positions in business.
“It’s part of changing the culture of the high growth era of the 1960s to 1980s, when men worked like mad and needed their wives at home. There has since been a move to focus on less time in the office but improving productivity and the work life balance for men. Well educated people are desperately needed to come in and this is where women can help. We are also seeing a refreshing increase in female entrepreneurs.”
Why do you have such a strong-bias towards smaller companies in your portfolio?
“Japan is dominated by smaller companies. Of the 4,000 listed stocks around 90% of them are smaller companies. Despite this, there are not many small-cap specialists, which means the majority of companies are under-researched. Therefore there are plenty of investment opportunities for those willing to take the time to look.”
What is the process you use to uncover these smaller companies?
“The most important part of the process is meeting with companies – first-hand information is essential. It helps me learn about things others do not have insights about.
“We often hear about smaller companies from sector analysts employed by brokers – these are usually a great source of information. We’ve also recently hired an analyst (Go Saito) who was previously head of the small-mid cap sell-side business SMBC Nikko Securities. He is literally the most connected person in the small-cap world. We’ve known each other for two decades. His sales side skills are invaluable. He is also working with young entrepreneurs in Japan. Go joined in February 2019 and has already visited 100 companies in Tokyo.”
Please explain how you look to mitigate risk whilst retaining a bias to smaller companies?
“Our focus is on finding and holding growth stocks for 5-10 years at least. As a multi-cap fund we also have some larger company holdings to control risk (in terms of volatility). But our risk level is always lower than the peer group.
“We hold around 100 stocks to spread risk. SoftBank is currently my largest holding at 1.9%*. Once a holding goes past 2%, I will look to top-slice the position to manage risk. I will sell the whole position if I believe the product behind a company becomes obsolete or I lose trust in the management.”
*as at 17 April 2019