Q: How did you as a Japanese come to manage Japanese equities from Switzerland?
A: After graduating from university, I joined the Bank of Japan as a research analyst. In that context, I looked into financial deregulation in Japan, then called financial “big bang”. That’s how I became interested in asset management. In 1998, Goldman Sachs Asset Management was hiring people and I joined their sales team. Two years later, their Japanese equity team was expanding and required two more managers, so I applied and was accepted. This is how I began to manage Japanese equities. I then worked in New York for a few years, but I always wanted to live in Europe where I had spent 10 years growing up. So I asked headhunters to introduce me to companies that were recruiting Japanese equity managers. By a stroke of luck, GAM needed to replace a departing manager and I was accepted there.
Q: In what way has Abenomics changed investors’ view of Japan?
A: Initially nobody wanted to listen to our Japanese equity story, but as a result of Abenomics, many investors became interested in the Japanese market. Since then I have been travelling Europe extensively promoting GAM’s Japan products.
Q: In Japan people still feel that the third so-called “arrow” of Abenomics has had little impact so far. How do you see it?
A: I have been telling investors that the third arrow, structural reform, will take time to have an impact after the first and second arrow, QE and fiscal stimulus, respectively. For example, the Japanese government has started reducing corporate taxes, aiming for the tax rate to go below 30% within five years. Female work participation has increased by a few percentage points in two years. So the third arrow has yielded some results, but not enough to fulfil people’s expectations. However, sentiment is improving. We even hear companies’ senior management saying that they are in a position to raise prices and hike wages. So I actually believe Abenomics is relatively successful.
Q: S&P recently downgraded Japan’s credit rating by one notch. Does this have any influence on the Japanese equity market?
A: I believe not. The companies we are invested in are independent from the Japanese government, so they are not affected by the downgrade. Having said that, it is true that foreign investors usually consider the macro environment before investing in a country’s stock market, and Japan is no exception. European investors usually start by taking a top-down view of Japan. Which is why they are concerned about Japan’s shrinking population and budget deficits. However, we as fund managers believe that stock prices are above all driven by a company’s financials, so we do not change our positioning just because there is news of a downgrade.
Q: So when you talk to investors, do you start with macro topics?
A: It depends. If an investor knows a lot about Japan, I will directly start by explaining our investment approach. If an investor is not that familiar with Japan, however, I will start with the current macro environment. Some investors are impressed that Japanese corporate results are now better than they were before the financial crisis.
Q: When you do talk about macro topics, do you for example discuss the Chinese economic slowdown?
A: In light of how global Japan’s economy has become, we cannot ignore the international environment. As far as the equity market is concerned, investors do respond to the Chinese slowdown by tending to reduce positions in companies with exposure to China. Yet I don’t feel very comfortable that the market becomes volatile whenever there is negative macro news from China. After all, not many companies are well-established in China. In fact, many are only beginning to gain a foothold.
Q: That’s a very interesting point, and certainly true for small and mid-cap companies that generate most of their business in Japan. Yet there are many large cap companies that operate globally. Aren’t they affected by a Chinese slowdown?
A: It is natural to think that way, as 20% of Japanese exports go to China. Yet many companies manufacture parts and materials in China for further export to third countries. So half of the above 20% can in fact be seen as exports to the US and Europe. Therefore, on the surface, Japan can be regarded as dependent on China, but I feel the US and Europe actually are more vital.
Q: Recently Japanese corporates have begun to focus on corporate governance. Yet we all recall the corporate scandals at Olympus and Toshiba. How are these scandals seen overseas?
A: Investors still remembered the Olympus story from four years ago, so when the Toshiba scandal broke, investors said Japanese companies did it again. I personally regard these incidents as company specific. It would be too much of a generalization to say that all Japanese companies’ corporate governance is ineffective. In June the Japanese government introduced a new corporate governance code. Overall, Japanese companies very much abide by the regulatory requirements, so I think the code is effective.
Q: Has implementation of the code been tangible?
A: Yes. For example, the code stipulates that companies hire two outside board members. We have seen companies without outside board representation starting to make room for such members, so the code is bringing about meaningful change.
Q: Which sectors do you favour, which ones do you avoid?
A: We pay particular attention to factory automation (FA). So far FA has been used to raise productivity in developed countries. However, wage inflation in emerging countries is also prompting companies to start adopting FA there. Demand for FA is increasing, so we regard this sector as a growth sector. However, we do not invest in real estate. This sector is highly cyclical, and cash flow tends to be unstable. We also avoid the commoditised materials sector, as it is also very cyclical and volatile. We lack the expertise to manage the risks inherent to these sectors. As far as the financial sector is concerned, rather than outright avoiding it, we are extremely careful in our stock selection.
Q: Many investors wonder about the merits of active management. Do the European investors you talk to wonder whether they wouldn’t be better off investing with an active manager based in Japan?
A: Indeed they do. But of course any Swiss-based Japan manager can deliver performance. The very reason why I initially hesitated to move to Europe was the concern that I might not get enough information abroad. But now that I actually work in Europe, I realize several things. Access to senior management – essential to understand companies – is easier in Europe than in Japan! When Japanese senior executives visit Europe on roadshows, they tend to meet with large investors such as us at GAM. We manage assets of over JPY 300 billion after all. So in fact, I’ve met several senior management teams whom I would not have been able to meet in Tokyo.
We are also a long term investor with very low turnover. Thus we do not compete with information volume or speed. We factor in 3-5 years for corporate development, so we do not have to be in Tokyo. Plus, my working hours overlap with Japanese market hours, so it really makes no difference if I sit in Zurich or Tokyo.
Q: What are the merits of active investment?
A: If you invest in an ETF, you basically invest in all the companies listed in the index the ETF tracks. Therefore, you may invest in loss making companies as well. As active managers, we seek out the companies that report good results, are of high quality and have a sound business model and capable management etc. In our portfolios, we focus on such companies in an effort to outperform the market.
This interview was conducted by Nippon Wealth Limited and originally published by Gentosha, Japan. http://gentosha-go.com/articles/-/873