30 January 2018
“Wake from death and return to life”
The quote above is an old Japanese idiom meaning to turn a bad or desperate situation into a success, but when Ernst Glanzmann looks back on his long career he does not view the fall and subsequent rise of the Japanese stock market in these terms at all. “From my perspective, we have been through a really exciting period for Japanese stocks, with various levels of corporate recovery becoming visible at different stages. It is just that we have also seen episodes of paralysing fear overshadowing significant developments and improvements in the corporate sector.”
Ernst began his career as an investment professional when he became a junior equity analyst at Bank Leu directly after the bursting of the equity bubble in 1989. So, this must have been a baptism of fire? “It was more like jumping in at the deep end than being flung into the flames, but it is true that everything was suddenly heading south after a roaring bull market; and everybody wanted me to tell them what was going to happen next! When I look back on those days now, it is the valuable experience I gained rather than the hysteria that immediately springs to mind.
“Experiencing the collapse of the banking sector right at the outset of my career afforded me a rare opportunity to see how authorities handle an unprecedented crisis. In the midst of the turmoil in 2008, officials at the Federal Reserve, the European Central Bank and the Bank of England all talked in terms of averting a Japan-type scenario. However, in the late 1980s, Japanese officials could only draw on the lessons from a smaller crisis in Asia that began in Hong Kong in the 1970s, or look right back to the 1930s.”
Rising through the ranks
Ernst has managed Japanese equity funds for 15 years, but he got there via a rather unusual route. “I began my career as an apprentice at a small regional bank, but I was always interested in the investment side of finance. I jumped at the chance to work in clearing for Zurcher Kantonalbank in Zurich as this brought me close to the stock market, even though the job mainly entailed pushing paper around.
“After that, I joined Bank Leu as a market phone operator. In those days, trading took place on ‘the floor’, where traders shouted orders to each other. Bank staff took customer orders by phone from ‘the ring’ and then they would sprint onto the floor where the traders would execute them immediately. While the job was very hectic the one lesson I remember to this day is that an idle mind can be dangerous. When we were really busy, order execution was perfect, but mistakes crept in during quieter periods.”
It was around this time that Ernst gained an internal move at Bank Leu and discovered his vocation. “The role of an equity analyst captivated me from my first day. I love the detective work involved in really understanding a company. And, if there are any skeletons in the closet that I need to be aware of, I want to find them.
“After I left Bank Leu, I spent a further 10 years as an analyst at Bank Julius Baer before becoming a junior portfolio manager. When my boss and mentor left the firm to start his own business in 2003, I was offered the chance to run the portfolio myself. I immediately asked for several months’ grace to carry out extensive repositioning because this was a pivotal moment for the Japanese finance industry. The legacy portfolio had no exposure to banks at all which had been the right call in the preceding years. But, after a long delay, lenders had finally cleaned up their balance sheets, writing billions off in bad loans in the process. This made them ‘investable’ once more and, in my view, the portfolio required a radical makeover.”
Finessing the approach
In addition to adjusting the portfolio’s positioning, Ernst embarked on a successful experiment that continues to define his approach to this day. “I created a virtual shadow portfolio in which all positions had exactly the same weight and were regularly rebalanced. Although there were no convincing studies to validate the equally weighted approach at the time, I thought there could be some merit to it and, after several years of patient observation, I was convinced this was the case. The fund’s assets were subsequently split into two separate strategies in 2008, including a concentrated portfolio of high-quality growth stocks which were equally weighted. This is a model I have successfully pursued ever since and I believe it is one of the keys to achieving a significant excess return on a consistent basis.”
Ernst’s track record clearly suggests that being based in Zurich is no impediment to managing Japanese equities – in fact, he can identify some advantages. “The management teams of many of the leading Japanese corporations come to Europe very regularly and are able to make time for their investors and answer questions. Conversely, when they return to Japan, they tend to be entirely focused on business and therefore much less accessible to domestic investors. I am far more interested in hearing about a CEO’s vision and details of their strategy than having localised access to short-term numbers. I want my portfolio to reflect long-term corporate trends, rather than short-term noise and nuance.”
So, what is the biggest challenge for a portfolio manager with bucket loads of experience, a finely-tuned approach and a successful track record?
“Perception! Japan itself remains hard to sell despite a number of years of robust equity performance. It still feels as though the market is tainted by 1990s associations. Asset allocators continue to be fixated on the likes of demographics, national debt and exchange rates. We invest in leading businesses, not the nation! Unfortunately, issues such as political instability often tend to distract people from what really matters - I don’t see anything to be scared about from a fundamental point of view.
A passion for travel
Although Ernst is based in Switzerland, the demands of his job mean that he spends several weeks a year in Japan and he breaks into a broad smile as he reminisces about one of his formative experiences.
“I remember visiting a factory in the early years and being treated like a head of state. Honestly, they flew the Swiss flag alongside the Japanese one and the employees formed a guard of honour when I got out of the car. It was a rather surreal feeling and is a striking example of how different the culture is in Japan. I find this really fascinating and my curiosity drives me to explore different parts of the world. A really good example would be the trip I took to Indonesia in the 1980s. Back then, the country wasn’t particularly well developed for tourism like it is today and I don’t think I have ever experienced such human warmth as I did there.”
Clearly, extreme climates and hostile environments do not perturb Ernst as he goes on to recall trips to both the North and the South Poles.
“To be honest, an organised visit to the North Pole in no way resembles a TV documentary about the early explorers. The question of physical fitness and fortitude is pretty much irrelevant since we were flown in! Similarly, I reached the South Pole by ship. The emperor penguins that live there still constitute the most wonderful memory I’ve collected on all my travels. Like me, they are very curious and will come right up close if you hunker down and stay quiet.”
Although you can take the Swiss man out of Switzerland, the pleasures of domestic travelling are not lost on Ernst. “I really enjoy hiking and skiing in the Bernese Oberland. I grew up in the nearby Huttwil area, where I lived on a farm in a small village. Although I helped out agriculturally before I started my bank training, I really couldn’t imagine life as a farmer. Fortunately, my brother took over the reins and he still runs the family farm today. I am much more comfortable in an office environment and I consider myself to be very lucky in being paid to scrutinise such a varied and dynamic stock universe.”
Where next for Japan?
“Although Japan is admittedly the home of some former consumer giants that have failed to adapt to the digital age, this should not deflect attention from the country’s record for outstanding innovation. If the term ‘cutting edge technology’ is mentioned in relation to a field of specialist expertise, you can pretty much guarantee that a Japanese company is one of the global leaders in this area. Japanese names may no longer dominate the most popular consumer brands, but, for example, an iPhone consists of approximately a thousand components, around half of which come from Japanese production.”
“In my view, people should consider investing in Japanese equities for deeply fundamental reasons. Corporate profit growth in the past 20 years has been just as high in Japan as it has in the US, and higher than that in Europe, yet Japanese equities appear much more compellingly valued, following decades of underperformance. Furthermore, as the corporate culture has evolved, these profits are being increasingly distributed to shareholders rather than hoarded on balance sheets.
“From our perspective, we seek to invest in businesses that can repeatedly grow their earnings at a decent pace, focusing on strong companies while trying to avoid the value traps. Essentially, we’re looking to take only the best out of the market rather than hug a benchmark index. We conduct lots of interviews with successful business leaders and we can really sense the enthusiasm and eagerness to build on achievements. This vibrancy and dynamism is infectious.
“Japan remains under-represented in global investment portfolios, but this surely has to change soon?”
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