As Japan’s domestic investor base returns to its local market by increasing their allocation to Japanese equities after two decades of hibernation, these efficient capital allocators, these permanent start-ups, are a part of the investible universe which is winning attention.
The following article takes a break – for which the editors are deeply grateful – from the 24/7 coronavirus coverage to delve into the details of Japanese companies’ prospects and characteristics. Japan has in recent years sought to loosen up some of the corporate governance rules in order to give the economy a supply-side kick. There have been a few false dawns for Japanese equities in past years – it will be interesting to see how the market fares in future.
The author of this article is Richard Kaye, portfolio manager of the Comgest Growth Japan fund. The editors are pleased to share these views and invite responses. The usual editorial disclosures apply. Email email@example.com and firstname.lastname@example.org
Japan is the home of the world’s oldest companies and boasts one of the highest concentrations of large family-run businesses on the planet. At the start of the 21st century, one third of all Japanese listed companies had some kind of family control and that remains the case today.
Japan’s tendency to corporate family ownership can be explained by its relatively recent industrialisation. First, an industrial and service infrastructure of family companies sprang up alongside and became symbiotic with the state-affiliated enterprises which pushed the country into economic modernity. Second, Japan’s economic miracle of the 1970s is so recent that many founders from that era are still in charge.
Investors should pay close attention to these businesses, perhaps more than they do at present. We have observed many cases globally where family or founder-owned or run companies align well with shareholders’ interests, and in Comgest’s Japan portfolio we take that idea quite far. About one third of our holdings and, in our opinion much of the fund’s long-term outperformance, is from companies which fit that definition. Some examples are Fast Retailing, Hikari Tsushin, Nidec, Keyence, Softbank, Pan Pacific, Nihon M&A, Hoya, Obic, Zozo, Peptidream, Kobe Bussan and Sushiro.
Simply put, we view these companies as having a “Day Zero” mentality which translates naturally to capital discipline with a long-term mindset, through the pursuit of unique businesses. These are start-ups which grew old. They speak the language of the shareholders because they are run by a major shareholder. With not just skin, but blood sweat and tears in the game, they certainly seek returns but importantly, they also seek long-term survival. They are the original ‘ESG’ players before ESG existed; they fulfil a sustainable social role and their capital allocation choices have rewarded our trust.
Hoya Corporation, which has parried its core strength in glass processing into near dominance in disc substrates and semiconductor imaging materials, is a classic case. This family glassware business gained national renown from supplying US occupation authority buildings. The company’s willingness to divest its legacy crystal ware business and the camera business, to which many Japanese companies are unprofitably wedded, or to build a contact lens retail network in Japan which draws on Hoya’s ophthalmic presence but sells other companies’ lenses because that is more profitable, all reflect this flexibility and almost ruthless pursuit of return. When we asked owner and founder President Suzuki which businesses he keeps and why, his answers were as if from a textbook: ‘the company is not mine; any business can grow old and we constantly need to consider divesting’. The words are not from a book, though; they express how he really thinks at the interstices of his organisation.