The growing focus on corporate governance in Japan may be a positive trend but it could result in fewer value opportunities over the long term, says Jeffrey Atherton, senior portfolio manager of the Man GLG Japan CoreAlpha strategy.
The $7.7 billion fund focuses on large-cap value investing – that is, buying stocks it believes are underpriced. This approach tends to work better in markets where there is less emphasis on corporate transparency and best practice, because that makes it harder to determine a company’s true value.
Hence value strategies have been more successful in Japan than in, for example, the US. According to data provider Axioma, value investing has strongly outperformed medium-term momentum factors (return over the past 12 months excluding the most recent month) in Japan.
In terms of average five-day returns since 1999 in Japan, value has returned 0.14% by versus 0.01%. In contrast, medium-term momentum has returned 0.1% in the US versus 0.08% for value, and the figures are 0.11% and 0.04%, respectively, for Europe.
The environment in Japan has tended to limit share prices rises over time, suggested Atherton. “If Japan became completely American [with regard to its business culture], the Nikkei 225 would be at 40,000, not 18,000.”
Still, the trend towards better governance is helping to boost the price of certain shares in the short term, something Man has benefited from. The Japan CoreAlpha strategy has sold large positions in electronics giants Nintendo and Sony this year, after they posted gains following pressure for change from activist investors.
Nintendo’s stock price soared 36% over March 18 and 19 following the announcement of strategy changes sought by Hong Kong-based hedge fund Oasis Management. And Sony’s stock price has risen 44% this year in the wake of a turnaround effort initiated in 2012, contributing to a gain of 428% since November 30, 2012. This has attracted activist managers such as New York’s Third Point to acquire (and recently sell) stakes in the company.
Atherton is hopeful about a similar outcome following Singapore-based Effissimo Capital Management’s purchase of an 8.6% stake in electronics firm Ricoh last month.
Meanwhile Atherton has also been focusing on stocks that have been out of favour due to the slowdown in China’s economy and reduced demand for commodities, such as Nippon Steel, Mitsubishi Corporation and oil-and-gas producer Inpex. For instance, he boosted his holding of Nippon Steel to 4.34% from 4.14% of the portfolio last month.
Japan CoreAlpha has had a decent – if choppy – past year. It has gained 10% so far in October, after losing -9.81% in September, and is up 10.27% for the 12 months to end-September, compared to 8.42% for its benchmark index, the Topix.
Atherton has reason to believe that value investing will remain a winning strategy for Japan’s equity market for the time being. “Firstly, there are no hostile takeover bids – that lets companies get very cheap,” he said.
“Secondly, you don’t get shareholder maximisation to the same degree as in the US,” he noted, in the sense that when businesses do well, the tendency is for management to think more about suppliers, employees and customers than shareholders.