While Japanese companies are some of the largest contributors to the MSCI World index, making up more than 8 per cent of the benchmark, international investors are frequently missing out on the swathe of domestically-focused companies, according to Evenlode’s Chris Elliott.
But although some investors overlook Japan’s domestic companies Elliott – co-manager of the TB Evenlode Global income fund – said that there were “potential gems” to lbe found there.
Although the £331m fund only holds 2.9 per cent in Asian stocks –with most of the concentrated portfolio held in US, Europe and UK names – Elliott said a high level of value can tbe found in some Japanese stocks.
The Japanese corporate sector has benefited from prime minister Shinzo Abe’s package of economic reforms known as ‘Abenomics’ aimed at modernising and stimulating the economy.
As such there are a number of Japanese cash-generative companies that meet the manager’s high quantitative and qualitative standards.
“These companies illustrate the variety and strength of corporate Japan, with a combination of hard-to-replicate domestic business models and leading positions in niche international markets,” he said. “They all demonstrate the economic moats and pricing power we demand of any company we would consider for investment.”
Performance of indices over 10yrs
Source: FE Analytics
Despite being wary of a market where many investors have hbeen burned in the past, Elliott said the five companies below have overcome those concerns.
“We remain aware of the risks of investing in a new market, and for precisely this reason, place high value on both the level of openness and strength of corporate governance at the companies,” he explained.
Hoya Corporation
The first company on the list is glass-tech company Hoya Corporation, which produces healthcare products such as glasses and endoscopes.
In addition, the company is also a leader in manufacturing semiconductor components. In an area of few rivals this means they can command significant pricing powers, said Elliott.
“Sales ough someare driven by research and development rather than sales volumes,” said the manager. “This allows Hoya to avoid much of the boom-bust demand of the semiconductor cycle.”
He added: “By centralising production and investing a new smart-factory, Hoya will be the lowest-cost producer in the global market.”
“Combined with a disciplined programme of acquisitions, this should enable the company to expand sales quickly to meet growing market demand.”
Changing demographic trend also provide further opportunities for growth with ageing populations in developed markets and better access to care in emerging markets.
Meitec
Whilst the ageing population may be a demographic moat for the Hoya Corporation in the labour force it’s becoming a major issue, particularly in the case of skilled engineers.
“The shortage of skilled engineers in Japan is a major problem, stemming from an ageing population, lack of immigration and low labour mobility levels,” said the Evenlode Global Income manager.
The consequences, Elliott said, are that many cyclical companies with significant R&D (research & development) operations struggle to internally source experts in fields key to future product development, such as the Internet of Things or robotics.
“To fill this gap, the Japanese economy has seen the rise of technical outsourcing, and Meitec is the market leader in supplying research engineers for complex development problems,” he added. “The quality of engineers allows the company to charge a 40 per cent premium to competitors.”
To maintain themselves as market leaders Elliott said that they make themselves desirable to engineering graduates, drawing them back home with a steadily increasing wage package and specialism opportunities. All of which is fed back into the Japanese economy in what he called a “virtuous cycle”.
Suntory Food & Beverages
Sake is arguably the most famous Japanese alcoholic export but within the country itself it’s the non-alcoholic choices which prove to be much more popular.
Manufacturers of well-known European brands – such as Lucozade, Ribena and Orangina – the company’s “true value” lies in the Japanese and Asian brands.
Performance of stock over 5yrs
Source: Topix
“The portfolio is heavily biased towards water, tea and coffee; all products that benefit from the developed market consumer trend that has seen tastes move away from sugary carbonates and juices and towards more health-conscious products,” said Elliott.
In addition, the company’s vast distribution network of vending machines are a key driver of its success with one-third of sales coming through the channel and create a barrier to entry for other entrants.
“While these vending machines would likely be vandalised in other countries, the uniquely respectful Japanese culture allows them to operate in the country,” he said. “Suntory is reducing the cost of operating this network, utilising wifi-connectivity to monitor stock and algorithms to plan routes for collections and deliveries.”
Trend Micro
With cybercrime a top priority for management teams of global companies, providers of cybersecurity have become increasingly important to ensure businesses continue running day-to-day. However, with many different providers and products, this can prove a complicated issue for companies.
Trend Micro, said Elliott, acts as a one-stop shop for customers offering a wide range of products and services.
“This breadth of offering, combined with Trend Micro’s excellent brand reputation, is key to attracting new customers through the global network of third-party resellers and distributors,” he said. “Fears over potential brand damage from cyber security failure has hastened the speed of adoption and new product take-up. This is demonstrated by 95 per cent renewal rate among large customers.”
Japan Exchange Group
The final stock pick is a Japanese financial services corporation, Japan Exchange Group, which dominates the domestic equity market with 90 per cent of volumes traded on its platforms.
This dominance, said Elliott, creates a powerful network effect for matching trade requests, allowing trades to occur faster and with lower cost.
“Entrance from abroad is effectively forbidden, with regulation creating high barriers to any of the European or US exchange operators,” he added. “As a result, the firm has an effective monopoly.”
Delving further into why it’s one of the uncovered domestic gems Elliott explained that: “Japan Exchange Group sees expanded information services as key to driving future growth.
“Abuse of pricing power is prevented by a culture prioritising market harmonisation over increasing margins. Prices are not changed without the agreement of the major market participants. This means increased profits can only be obtained through introducing value-add services, such as implementing improved platforms allowing high-frequency trading and co-location services.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
The TB Evenlode Global Income fund launched in November 2017 and is also co-managed by Ben Peters, investing in a global portfolio of income-paying stocks.
The fund is highly regarded by Square Mile Investment who said: “This is a recently launched and interesting fund that invests in high quality, growing dividend-paying globally listed companies. It had a clear outcome orientated investment objective and a process that compliments it well.”
Since launch, the fund has made a 23.67 per cent, compared with a 14.51 per cent return for the MSCI World index and a 9.3 per cent gain for the average IA Global Equity Income peer. It has a yield of 2.3 per cent and an ongoing charge