Latest / Merryn Talks Money / It’s Time to Buy Japan

Transcript

It’s Time to Buy Japan · Merryn Talks Money

• 0:00
  Speaker 1: John, Hello him.
• 0:02
  Speaker 2: You know, John, you and I have done something that
• 0:06
  Speaker 2: is increasingly unusual.
• 0:10
  Speaker 1: It's not recording a podcast. I could tell you half
• 0:12
  Speaker 1: or not.
• 0:13
  Speaker 3: No, I'll tell you what.
• 0:14
  Speaker 2: It's not that. And just to be clear, recording a
• 0:16
  Speaker 2: podcast is something we do together, and the thing I'm
• 0:18
  Speaker 2: mentioning is not something we do together.
• 0:21
  Speaker 3: We have replaced ourselves.
• 0:24
  Speaker 2: I like that.
• 0:25
  Speaker 1: We that we are looking at it. Yes, we have
• 0:29
  Speaker 1: spawned new people.
• 0:31
  Speaker 3: We have we will when.
• 0:32
  Speaker 2: We leave this earth, all fingers crossed, we will leave
• 0:35
  Speaker 2: behind us a replacement.
• 0:38
  Speaker 1: Carry on our good work.
• 0:42
  Speaker 2: I'm not sure my children are going to want to
• 0:45
  Speaker 2: take over the podcast, but maybe one of yours.
• 0:47
  Speaker 3: Well. The point being that we've been talking.
• 0:51
  Speaker 2: About this for years, Ear and me about the fall
• 0:55
  Speaker 2: in the global fertility rate. You know, done to what
• 0:57
  Speaker 2: is it now? I can't remember, but it was thirty
• 0:59
  Speaker 2: years ago, was pushing pushing three and now we're down
• 1:02
  Speaker 2: to only just over two. And there are an awful
• 1:04
  Speaker 2: lot of countries where where fertility rate is well below
• 1:07
  Speaker 2: replacement rates. So you know, the US, China, India the
• 1:11
  Speaker 2: most recent one to see it. For quite a lot
• 1:13
  Speaker 2: of countries, particularly in Europe, I have already seen their
• 1:15
  Speaker 2: population's peak. If we put immigration potential to one side,
• 1:18
  Speaker 2: the Japan, Italy, Germany, Spain, etcter. As far as we
• 1:21
  Speaker 2: can see, all of those populations of peak and fertility
• 1:24
  Speaker 2: rates in Africa that is supposed to be the big
• 1:27
  Speaker 2: driver of global population are falling much faster than people
• 1:31
  Speaker 2: expected as well. So if ten years ago the main
• 1:35
  Speaker 2: worry was population explosion, today we're actually thinking more empty planet.
• 1:40
  Speaker 1: Yeah. I think this is really fascinating, persibly for slightly
• 1:47
  Speaker 1: different reasons, because I just find it amazing that we
• 1:50
  Speaker 1: can have turned around so quickly. And I bet you,
• 1:53
  Speaker 1: I bet a lot of your listeners podcasts still think
• 1:55
  Speaker 1: that overpopulation is the biggest problem, and this will actually
• 2:00
  Speaker 1: still come as a surprise them, despite the fact was
• 2:02
  Speaker 1: on the cover of The Economists.
• 2:03
  Speaker 4: The other day.
• 2:04
  Speaker 3: Finally, well, usually if.
• 2:08
  Speaker 1: Something's in the front cover of the Economists, that's kind
• 2:10
  Speaker 1: of it's in the place.
• 2:13
  Speaker 2: Actually, we shouldn't go down this road of criticizing you
• 2:16
  Speaker 2: and I have formed job.
• 2:17
  Speaker 1: Absolutely absolutely. Yeah, we did put back coin on the
• 2:21
  Speaker 1: cover in December twenty seventeen at Money Week. I do
• 2:23
  Speaker 1: rememb about that, but.
• 2:25
  Speaker 2: I'm pretty sure that was your decision.
• 2:26
  Speaker 1: That was my fault.
• 2:29
  Speaker 2: Absolutely, But listen, so when we think about this, when
• 2:33
  Speaker 2: we think about this, you don't think that we should
• 2:35
  Speaker 2: really think about this much in terms of investment, but
• 2:38
  Speaker 2: it does have a big impact on the inflationary slash
• 2:41
  Speaker 2: deflationary environment. And there's an ongoing conversation about whether aging
• 2:45
  Speaker 2: populations and falling populations are inflationary or deflationary, and I
• 2:49
  Speaker 2: think you and I both veered towards thinking that it's
• 2:52
  Speaker 2: one of the drivers behind the inflation rey environment because
• 2:55
  Speaker 2: you have a well off, older population demanding all sorts
• 2:59
  Speaker 2: of things and a much more limited supply.
• 3:02
  Speaker 3: Of labor to provide those things. So obviously the cost
• 3:04
  Speaker 3: of stuff is going to go up.
• 3:06
  Speaker 1: Yeah, I actually I agree with that. I think that's
• 3:09
  Speaker 1: that's true. I think that's fair. But the point you
• 3:13
  Speaker 1: just made it about a there's a debate about it,
• 3:15
  Speaker 1: so you know, economists have been tossing it back and
• 3:17
  Speaker 1: forth for years. But the other thing I suppose is
• 3:21
  Speaker 1: that I think the demographics is one of those things
• 3:24
  Speaker 1: that can change so quickly because the forecast are so
• 3:27
  Speaker 1: long term and they're based on a certain number of assumptions,
• 3:31
  Speaker 1: and the very fact that for most of my adult life.
• 3:35
  Speaker 1: People have been carping about how there's too many people,
• 3:39
  Speaker 1: and lots of people still believe that Malthusian crap put
• 3:41
  Speaker 1: forward by Airlick in the population bomb that I guess
• 3:46
  Speaker 1: I don't see the point of investors worrying their heads
• 3:49
  Speaker 1: about it simply because it's it's such a it's way
• 3:56
  Speaker 1: out in the future, and there are so many more
• 3:58
  Speaker 1: things that affect affect individual investments before that. I just
• 4:03
  Speaker 1: don't think, and I certainly don't see it as a theme.
• 4:06
  Speaker 1: It's like I don't think. I mean, yes, okay, you
• 4:09
  Speaker 1: can invest in agent populations in that they'll need more
• 4:12
  Speaker 1: medical care, but in and of itself, that's not a
• 4:16
  Speaker 1: recently by a specific farmer company. You should other things.
• 4:21
  Speaker 3: I'll give you all that. I mean, it could drive
• 4:23
  Speaker 3: healthcare innovation.
• 4:25
  Speaker 2: It's one reason to be interested in AI because that's
• 4:27
  Speaker 2: the kind of thing that could really eventually help us
• 4:30
  Speaker 2: manage our healthcare and the care of our elderly. It
• 4:32
  Speaker 2: might drive innovation. And I don't know the life insurance
• 4:35
  Speaker 2: industry that sort of things. So there's a lot of
• 4:37
  Speaker 2: stuff going on with the aging population.
• 4:39
  Speaker 3: But I'll give you that.
• 4:41
  Speaker 2: The much longer term demographics might not make much difference
• 4:44
  Speaker 2: to one's investments over a five or TENNYAR period, But
• 4:47
  Speaker 2: I did want to say one thing I prefer what
• 4:49
  Speaker 2: we're talking about in the podcast today, which is Japan,
• 4:52
  Speaker 2: which is that there's a general view that declining populations
• 4:57
  Speaker 2: or even static populations are a bad thing for economies,
• 5:00
  Speaker 2: and that an aging population is also a bad.
• 5:03
  Speaker 3: Thing for an economy.
• 5:04
  Speaker 2: And people look at Japan and they go look at
• 5:06
  Speaker 2: that flatlining GDP, Look at that, you know, Japanese GDP
• 5:09
  Speaker 2: barely grows, etcetera, etcetera, and they forget to look at
• 5:13
  Speaker 2: the really important thing, which is GDP per capita, And
• 5:17
  Speaker 2: particularly if a population is shrinking, you don't want to
• 5:20
  Speaker 2: look at the main GDP numbers. You want to look
• 5:22
  Speaker 2: at every individual's every individual person's purchasing pair. And I've
• 5:26
  Speaker 2: just been looking up on the World Bank website to
• 5:28
  Speaker 2: see what's happening to Japanese GDP per head in terms
• 5:32
  Speaker 2: of purchasing power, and it's been incredibly.
• 5:35
  Speaker 3: Healthy over the last few decades. You're seeing real growth there.
• 5:38
  Speaker 2: Interestingly, as an aside, I looked up the UK as well,
• 5:41
  Speaker 2: and in terms of absolute purchasing power GDP per head
• 5:45
  Speaker 2: in the UK has actually been growing rather substantially as well,
• 5:48
  Speaker 2: and is above pre COVID levels.
• 5:50
  Speaker 3: So that's something interesting.
• 5:51
  Speaker 1: That's really interesting, especially Kevin that imignation has were sitting
• 5:55
  Speaker 1: in the last couple of years, it's rocketed and it's
• 5:58
  Speaker 1: always been very high compared to Japan.
• 6:00
  Speaker 3: That is interesting.
• 6:01
  Speaker 1: If you asked me a bit, I would have thought
• 6:03
  Speaker 1: that gdpeople ahead in the UK would have been weak
• 6:06
  Speaker 1: at best, if not negative.
• 6:08
  Speaker 2: Well, this isn't purchasing power parity measurement as opposed to
• 6:12
  Speaker 2: in absolute pound terms.
• 6:14
  Speaker 3: Yeah, right, we'll come.
• 6:16
  Speaker 1: Back to living.
• 6:17
  Speaker 2: It's really interesting and it's exactly the opposite to what
• 6:20
  Speaker 2: I expected as well, because I having looked at the
• 6:22
  Speaker 2: Japanese data. One of our listeners actually suggested that I
• 6:26
  Speaker 2: looked at the UK data as well and said, you know,
• 6:28
  Speaker 2: you're going to be surprised, and he was absolutely right.
• 6:31
  Speaker 3: I was surprised at you. That doesn't happen now.
• 6:34
  Speaker 1: That is really interesting. We should come back to that
• 6:36
  Speaker 1: at some point, I think, or in Japan. The other
• 6:39
  Speaker 1: thing that I actually do find interesting is that I
• 6:42
  Speaker 1: always again remember Japan being held up is the kind
• 6:45
  Speaker 1: of archetype of the declining population, but when you know,
• 6:48
  Speaker 1: look at Japan and relationship to the rest of Asia.
• 6:52
  Speaker 1: It's not even in the bottom five anymore. I don't
• 6:55
  Speaker 1: think I think you get like South Korea is by
• 6:58
  Speaker 1: far the worst I think on the planet, which makes
• 7:01
  Speaker 1: you wonderful. Why is that specifically? But there's a lot
• 7:05
  Speaker 1: of other interesting.
• 7:06
  Speaker 3: And look at the way that you're framing that the worst.
• 7:09
  Speaker 1: Oh yeah, John is.
• 7:11
  Speaker 3: Judging your career. John is judging.
• 7:13
  Speaker 1: You well, all traditional patriarch at the end of the day,
• 7:18
  Speaker 1: Look up.
• 7:19
  Speaker 3: Look up the way he's replaced.
• 7:21
  Speaker 1: Himself exactly, growing a great big beal as we speak.
• 7:28
  Speaker 2: Right. Moving on, Welcome to Meren Dogs Money, the podcast
• 7:33
  Speaker 2: in which the people who know the markets explain the markets.
• 7:36
  Speaker 2: I'm Maren Sunset Web this week of conversation with David Mitchison,
• 7:40
  Speaker 2: fund manager at Xeno Asset Management. It's got more than
• 7:43
  Speaker 2: twenty years investment experience. He's an antholute expert on Japan.
• 7:46
  Speaker 2: He speaks Japanese. You know, so it says on the website,
• 7:49
  Speaker 2: but I did touch him with a couple of words.
• 7:52
  Speaker 3: Has youmaged it? We're not actually going to do it
• 7:56
  Speaker 3: in Japanese.
• 7:56
  Speaker 2: I was just a true because that's the only word
• 7:58
  Speaker 2: I can remember from my ten years in Japan as well,
• 8:00
  Speaker 2: seven years whatever it.
• 8:01
  Speaker 4: Was this sight, Sinara, I'm sure this more.
• 8:05
  Speaker 3: Oh, thank you discard so David. Exciting times right.
• 8:11
  Speaker 2: The Japanese markets are the thirty three year high, the
• 8:14
  Speaker 2: topics up thirteen percent already year to date.
• 8:18
  Speaker 3: Now, I started my career.
• 8:20
  Speaker 2: In Japan in the nineteen nineties and this is about
• 8:22
  Speaker 2: exciting as it's been since since then.
• 8:25
  Speaker 3: So what I want to do. I want to talk
• 8:27
  Speaker 3: about Japan obviously the whole way through.
• 8:28
  Speaker 2: This podcast, but I want to start off by talking
• 8:32
  Speaker 2: about why it is that investing in Japan has been
• 8:35
  Speaker 2: such a difficult one for the last couple of decades,
• 8:38
  Speaker 2: you know. I mean I've looked at it with John together.
• 8:41
  Speaker 2: We've been working together for years, and we've looked at
• 8:43
  Speaker 2: Japan a year after year after year and said, this
• 8:45
  Speaker 2: is getting better, this is kind of cheap, people should
• 8:48
  Speaker 2: buy that, and we've been wrong over and over and
• 8:52
  Speaker 2: over again. So let's talk first about why it is
• 8:55
  Speaker 2: that John and I have been in this is unusual,
• 8:56
  Speaker 2: by the way, completely wrong for so long.
• 9:00
  Speaker 4: I think it's not just you that's been completely wrong
• 9:02
  Speaker 4: for so long. I mean a lot of people have
• 9:04
  Speaker 4: been completely wrong for so long, frankly, including you know,
• 9:08
  Speaker 4: my business partner James, who I think started investing in
• 9:11
  Speaker 4: Japan in nineteen eighty nine. I sort of started to
• 9:14
  Speaker 4: look in Japan perhaps in the year two thousand and
• 9:16
  Speaker 4: you know, since then, the market has had some bigger
• 9:19
  Speaker 4: ups and downs, but it's really only the lasts of perhaps
• 9:23
  Speaker 4: ten years that the market has begun to move up steadily.
• 9:26
  Speaker 4: And I think we have to kind of go back
• 9:28
  Speaker 4: to where Japan was in you know, the end of
• 9:31
  Speaker 4: the bubble, which was basic Christmas Day in nineteen eighty
• 9:34
  Speaker 4: nine when they raised interest rates over the previous nearly
• 9:39
  Speaker 4: forty years after Second World War, Japan had gone through
• 9:42
  Speaker 4: this of huge economic boom and it was obviously reindustrialized.
• 9:46
  Speaker 4: You had amazing companies like Sony, You've had, you know,
• 9:49
  Speaker 4: the rise of video recorders, of consumer electronics, and you're
• 9:54
  Speaker 4: also at the same time saw this massive domestic property
• 9:58
  Speaker 4: bubble where you know, the end of that bubble in Japan,
• 10:01
  Speaker 4: the price of kind of a meter of land in
• 10:04
  Speaker 4: you know, or apartment in Tokyo was three hundred and
• 10:07
  Speaker 4: fifty times higher than it was in Manhattan. I mean,
• 10:10
  Speaker 4: this is absolutely bonkers level of bubble. And so but obviously,
• 10:15
  Speaker 4: if you're sitting in an apartment, you know, worth fifty
• 10:18
  Speaker 4: million dollars in nineteen eighty nine, that's a lot of
• 10:21
  Speaker 4: money today. In nineteen nine, that was huge, and you know,
• 10:25
  Speaker 4: so the spending was out of control, The amount of
• 10:28
  Speaker 4: leverage people took was out of control, and a bit
• 10:31
  Speaker 4: like America before the GFC, the belief was almost that
• 10:35
  Speaker 4: the real estate prices could only go up. And for
• 10:38
  Speaker 4: fifty years they had so the belief that, you know,
• 10:41
  Speaker 4: you could lever up, and you know, from the bank's
• 10:44
  Speaker 4: point of view, you know, well if they couldn't pay
• 10:47
  Speaker 4: you for some reason, well the land price would have
• 10:49
  Speaker 4: gone up so much that you could always just sell
• 10:51
  Speaker 4: the asset and you'll be fine. And so you ended
• 10:53
  Speaker 4: up with these sort of interlayered companies who had basically
• 10:57
  Speaker 4: borrowed money against their collateral weather as stocks or land.
• 11:02
  Speaker 4: They then invested in not only other companies, but also
• 11:05
  Speaker 4: in projects that maybe not caught their business because of
• 11:09
  Speaker 4: everything you did seem to work during the bubble. And
• 11:12
  Speaker 4: it was only once the capital starts stopped flowing when
• 11:15
  Speaker 4: the bubble burst and people suddenly realized that the land
• 11:18
  Speaker 4: prices were extraordinarily high, their stock prices were extraordinarily high,
• 11:23
  Speaker 4: and as everything went into reverse, you had to repay
• 11:26
  Speaker 4: this debt. But suddenly the assets weren't there, the cash
• 11:29
  Speaker 4: flowers weren't there. And Japan, unlike most countries, chose to
• 11:33
  Speaker 4: save its way out of a bubble, which is, I
• 11:36
  Speaker 4: guess is the opposite of what we've seen in the West,
• 11:39
  Speaker 4: you know, after GFC. But it's really, I think probably
• 11:42
  Speaker 4: the only country in history that I can think of
• 11:44
  Speaker 4: that has actively chosen to save its way out of
• 11:46
  Speaker 4: a bubble.
• 11:47
  Speaker 3: And it's slightly too early to tell whether that was
• 11:49
  Speaker 3: the right or the wrong approach, isn't it.
• 11:51
  Speaker 4: So if we were to look at as sort of
• 11:53
  Speaker 4: senior Japanese business leader today, he probably I feel lucky,
• 11:57
  Speaker 4: just caught the tail end of the bubble, but then
• 12:00
  Speaker 4: has spent the next thirty odd years trying to work
• 12:05
  Speaker 4: through a debt deflation. And those sort of business executives
• 12:10
  Speaker 4: who are the most aggressive at the end of the
• 12:12
  Speaker 4: bubble are likely not to be here anymore because their
• 12:16
  Speaker 4: companies went bust, and so there's been an enormous survivorship
• 12:20
  Speaker 4: bias amongst those executives who are still here, companies who
• 12:24
  Speaker 4: are still here, and you can see that and perhaps
• 12:26
  Speaker 4: in some of the banks. You know, the biggest bank
• 12:28
  Speaker 4: in Japan is Mitsubishi UFJ, but that's a combination of Mitsubishi,
• 12:33
  Speaker 4: Cocasai UFJ and you know, and so many other banks.
• 12:38
  Speaker 4: And the same thing is true for you know, SMBC.
• 12:41
  Speaker 4: The same thing is true for Misoho, which is you know,
• 12:43
  Speaker 4: at least made of three very large banks. They used
• 12:47
  Speaker 4: to be many, many different companies have been forced to
• 12:50
  Speaker 4: merge and consolidate and rationalize, and in the process, obviously
• 12:53
  Speaker 4: that's created a lot of managers, the aggressive ones have
• 12:56
  Speaker 4: lost their jobs. And that's I think something that people,
• 12:59
  Speaker 4: perhaps I don't understand is that there's been this very
• 13:02
  Speaker 4: strong survivorship buyas. So for a long time, Japanese companies
• 13:05
  Speaker 4: were really just focused on surviving, being very very risk
• 13:08
  Speaker 4: averse and not taking any risks. And to some extent,
• 13:12
  Speaker 4: it meant that wasn't maybe the best and the most
• 13:15
  Speaker 4: aggressive managers who have thrived like they might maybe in
• 13:18
  Speaker 4: the US, but the dullest and the safest. And I
• 13:21
  Speaker 4: think what perhaps we're finally begin you see is that
• 13:23
  Speaker 4: that's changing, and that there are new companies coming through,
• 13:28
  Speaker 4: whether it's an internet or services in retail. You know
• 13:31
  Speaker 4: that you are seeing a newer generation of managers who
• 13:34
  Speaker 4: are coming through, who are perhaps a bit more attuned
• 13:36
  Speaker 4: to what's happened in the rest of the world. But
• 13:39
  Speaker 4: it means that a lot of Japanese companies have used
• 13:42
  Speaker 4: those that last of thirty years as an opportunity basically
• 13:45
  Speaker 4: to just hoard assets and hoard cash.
• 13:48
  Speaker 3: So this sounds like an absolutely brilliant combination.
• 13:51
  Speaker 2: We've got companies that are solid, high quality, conservatively but
• 13:57
  Speaker 2: reasonably run, perhaps low debt, and they're sitting there just waiting.
• 14:03
  Speaker 3: Making up a story for you. By the way, I
• 14:04
  Speaker 3: hope this is true.
• 14:05
  Speaker 2: They're just sitting there waiting these high quality, load debck
• 14:08
  Speaker 2: companies for a new generation of managers to come in
• 14:10
  Speaker 2: and leverage what they have.
• 14:12
  Speaker 4: Yeah, and it's not just that they're load debt. Most
• 14:15
  Speaker 4: companies in Japan are net cash. About forty percent of
• 14:19
  Speaker 4: companies have a quarter of their shareholder equity in net cash.
• 14:22
  Speaker 4: So we're not talking about real estate. We're not saying
• 14:25
  Speaker 4: about investment securities and things like that. This is just cash.
• 14:29
  Speaker 3: And in a deflation re environment or a very low
• 14:31
  Speaker 3: inflation environment.
• 14:32
  Speaker 2: That's fine, it makes sense to keep pilecast sitting around
• 14:34
  Speaker 2: on your balance set to agree.
• 14:36
  Speaker 4: Yeah, it means the return on cash is in real terms,
• 14:39
  Speaker 4: is pretty good. But it also means that if your
• 14:42
  Speaker 4: banking system is failing, and you know, you go to
• 14:46
  Speaker 4: the bank and you say, peace, can I borrow a
• 14:47
  Speaker 4: billion dollars? They say, actually, we were really rather hoping
• 14:51
  Speaker 4: you could lend us some money to recapitalize ourselves again.
• 14:55
  Speaker 4: So I mean during this debt deflation, the Japanese banking
• 14:58
  Speaker 4: system probably recapitalize itself about three times over. So that's
• 15:02
  Speaker 4: the kind of extent of the kind of debt wipeout
• 15:05
  Speaker 4: that you've seen in Japan. So companies weren't able to
• 15:08
  Speaker 4: rely upon the banks to finance them, and to some
• 15:13
  Speaker 4: extent they've had to build up, you know, or either
• 15:15
  Speaker 4: generate their own cash flow to pay for things, or
• 15:19
  Speaker 4: they've had to sort of save up effectively build their
• 15:21
  Speaker 4: own cash pile. And then you then go out and
• 15:24
  Speaker 4: you know, run their businesses they wanted to. But it
• 15:26
  Speaker 4: does mean that this incredible conservatism, as perhaps we move
• 15:30
  Speaker 4: engineer where inflation is let's say more than zero, is
• 15:33
  Speaker 4: something that begins to weigh on them. And the second
• 15:36
  Speaker 4: point about it is it's not just the cash the
• 15:39
  Speaker 4: return on the cash is, you know, positive or negative.
• 15:42
  Speaker 4: Is that if you start think about the cost of capital,
• 15:44
  Speaker 4: which is something that Tokyo Stock Exchange is beginning to
• 15:46
  Speaker 4: ask companies to do, suddenly realize that actually, for your
• 15:49
  Speaker 4: cost of capital or equity in Japan is say ten
• 15:52
  Speaker 4: percent roughly, then actually your cash is not returning you zero,
• 15:56
  Speaker 4: it's actually earning you minus ten once you're adjust for
• 15:59
  Speaker 4: the carrying cost. So if you think about companies with
• 16:02
  Speaker 4: twenty five thirty forty percent of their equity is basically
• 16:07
  Speaker 4: net cash, then actually it means you know that they're
• 16:10
  Speaker 4: overall the return you have to generate from your core
• 16:13
  Speaker 4: business to get a good roe is actually incredibly high.
• 16:17
  Speaker 4: And that's one of the things that you know, the
• 16:19
  Speaker 4: say Tokyo Socket Change right now is the new president
• 16:22
  Speaker 4: is particularly focused on and he's saying, we don't think
• 16:25
  Speaker 4: Japanese companies understand what their cost of capital is properly,
• 16:29
  Speaker 4: and we would like them really to look at this
• 16:30
  Speaker 4: and to understand more about what the cost of holding
• 16:35
  Speaker 4: the assets they use to run and operate their businesses.
• 16:37
  Speaker 4: Are and maybe some companies have actually got far too
• 16:41
  Speaker 4: many assets. And I think that this is really part
• 16:45
  Speaker 4: of this big change in kind of corporate governance that
• 16:47
  Speaker 4: has been going on since the days of you know,
• 16:50
  Speaker 4: O shinzo Abe, which you know was perhaps kicked off
• 16:54
  Speaker 4: kicked it all off with the shareholder governance and corporate
• 16:57
  Speaker 4: governance codes. And we think that you know, the this
• 17:00
  Speaker 4: is just taking time to gather and gather momentum and
• 17:03
  Speaker 4: to bear fruit. But we're now moving into a phase
• 17:06
  Speaker 4: where this is actually becoming much more real and the
• 17:09
  Speaker 4: conversations you have with companies are becoming much more meaningful.
• 17:13
  Speaker 3: It's interesting.
• 17:13
  Speaker 2: It's another example of people expecting things to happen too fast,
• 17:17
  Speaker 2: isn't it. And when abbe In produced all his reforms,
• 17:20
  Speaker 2: everyone got temporarily very excited and rushed into Japan and
• 17:24
  Speaker 2: then was disappointed a year or too later when really
• 17:26
  Speaker 2: nothing particular had happened, not noticing that under the surface.
• 17:30
  Speaker 3: All this was beginning to happen.
• 17:32
  Speaker 2: And now we're starting to see that the fruits of
• 17:34
  Speaker 2: that renewed focus on shareholder value for example.
• 17:37
  Speaker 4: Yeah, and I mean I think the key tempersise is
• 17:39
  Speaker 4: you're starting off from a very very low base and
• 17:42
  Speaker 4: the kinds of you know, you know, But also that
• 17:45
  Speaker 4: means the scope for improvement from that low base and
• 17:48
  Speaker 4: those very low valuations is quite big. So's I think
• 17:51
  Speaker 4: it's about the direction of travel and hopefully the pace
• 17:55
  Speaker 4: of that journey as opposed to the current level being
• 17:59
  Speaker 4: being very good.
• 18:00
  Speaker 5: And if you look at Japan in absolute valuation in terms,
• 18:03
  Speaker 5: it's still pretty cheap, isn't it. If you look at
• 18:05
  Speaker 5: relative the rest of the world is one of the
• 18:06
  Speaker 5: few markets that outside the UK that actually doesn't look
• 18:10
  Speaker 5: relatively inexpensive.
• 18:11
  Speaker 4: Yeah, it's very cheap. Companies have a lot of physical
• 18:16
  Speaker 4: and financial assets, so when you look at say shareholder equity,
• 18:19
  Speaker 4: it's almost all sort of tangible book value. And there
• 18:22
  Speaker 4: are aspects of Japanese accounting because of the deflation that
• 18:25
  Speaker 4: means that effectively assets are carried at either book cost
• 18:29
  Speaker 4: or market price, whichever is lower, so that there's kind
• 18:33
  Speaker 4: of an inherent downside bias in some of that accounting,
• 18:37
  Speaker 4: which kind of probably even understates some of the valuation
• 18:40
  Speaker 4: that you can see out there. But you also have
• 18:42
  Speaker 4: a number of perhaps some of the very large cap
• 18:44
  Speaker 4: global companies have been perhaps operating a more global fashion
• 18:48
  Speaker 4: have been more competitive, So you know, I think the
• 18:51
  Speaker 4: real opportunities more in the medium and smaller sized companies,
• 18:55
  Speaker 4: and perhaps more in the domestic companies than is in
• 18:58
  Speaker 4: some of the global companies. There there are some very
• 19:00
  Speaker 4: big names like Panasonic or Kaserah, for example, where focus
• 19:06
  Speaker 4: on shareholders has certainly not been a priority, and where
• 19:09
  Speaker 4: companies have not been very disciplined, and where there's a
• 19:12
  Speaker 4: lot of potential for change.
• 19:14
  Speaker 2: Let's talk a little bit about Warren Buffett, right, because
• 19:16
  Speaker 2: you're not the only one who sees value in Japan.
• 19:19
  Speaker 2: Buffett sees it too, and he's been investing. When did
• 19:23
  Speaker 2: he first invest in the big trading company's a couple
• 19:24
  Speaker 2: of years back. He's done extremely well out of that,
• 19:28
  Speaker 2: and he says that he says, we're not done investing
• 19:31
  Speaker 2: in Japan yet. He's in for the long term. What
• 19:33
  Speaker 2: is it that he's seeing in it? Is this purely value?
• 19:36
  Speaker 2: There's been some talk about him seeing Japan as a
• 19:40
  Speaker 2: beacon of stability in a geopolitically difficult world.
• 19:43
  Speaker 3: Is it that as well? Or are we just talking
• 19:45
  Speaker 3: about valuations with him?
• 19:46
  Speaker 4: Do you think I think it's it's there is some
• 19:50
  Speaker 4: very well Rund the trading comes in Japan, it generally
• 19:52
  Speaker 4: relatively well, tell you what.
• 19:54
  Speaker 2: Don't explain what a trading company is. I mean, in
• 19:56
  Speaker 2: some of these companies, they're almost unique to Japan. It's
• 19:59
  Speaker 2: hard to look around the to the world and put
• 20:00
  Speaker 2: your finger on a company that does exactly what these
• 20:03
  Speaker 2: this group of companies.
• 20:04
  Speaker 4: Do, right, Yeah, So a classic trading company would be
• 20:08
  Speaker 4: say Mitspishi Core, Mitsui and Company. And their role really
• 20:13
  Speaker 4: has been to go abroad to source products and especially
• 20:18
  Speaker 4: raw materials, to organize their transportation back to Japan, and
• 20:23
  Speaker 4: to find customers in Japan for those kinds of materials.
• 20:26
  Speaker 4: And they're also often a kind of an organizing basis
• 20:30
  Speaker 4: for much bigger groups called Kretzu. So we'd say Mittspishy,
• 20:33
  Speaker 4: I've got Mitspishi Trading, but you also have mits Spishi Bank,
• 20:38
  Speaker 4: it's Specih Chemical and Mitspecie Electric, Mitspishly Heavy Industries, mits
• 20:43
  Speaker 4: Spishi Motors as used to be. So there are many
• 20:47
  Speaker 4: many companies within that broader group that.
• 20:50
  Speaker 3: They're part of a group.
• 20:51
  Speaker 2: But they used to be held together by networks of
• 20:52
  Speaker 2: cross shareholding, right, which made them into a group. But
• 20:55
  Speaker 2: now it's not quite that connected. It's a very loose
• 20:59
  Speaker 2: connect so.
• 21:00
  Speaker 4: The crush shareholdings have gone down. But they're not just
• 21:02
  Speaker 4: connections of money, which is basically from the bank, but
• 21:07
  Speaker 4: also connections of people, connections of you know, things like
• 21:12
  Speaker 4: trade unions. You could even have, for example, a Nissan
• 21:14
  Speaker 4: group trade union and they would basically represent the workers
• 21:18
  Speaker 4: of the broader group, but that would also be another
• 21:22
  Speaker 4: point of connection between those organizations. But what it meant
• 21:25
  Speaker 4: historically is that the primary alignment for let's say managers
• 21:31
  Speaker 4: and companies wasn't to their shareholders. It was to the
• 21:36
  Speaker 4: group as a whole, because that's where their customers were,
• 21:39
  Speaker 4: that's where their you know, let's say directors were from,
• 21:42
  Speaker 4: that's where the personal relationships were, that's where the bank
• 21:46
  Speaker 4: who provided their money came from. And perhaps it's if
• 21:50
  Speaker 4: you think about Japan as a culture, it's a group culture,
• 21:53
  Speaker 4: so the group is very important. I mean foreigners in
• 21:57
  Speaker 4: Japan called gekokagin, which you know, kind of translated means
• 22:00
  Speaker 4: outside people. So you're outside and if you're outside, you're nothing.
• 22:05
  Speaker 4: So if I were to meet someone, you know, I
• 22:07
  Speaker 4: am you know, David, but I'm really Zenyl non Mitchenson.
• 22:11
  Speaker 4: I'm the Mitchison from Zenyl, and I derive some status
• 22:15
  Speaker 4: from being part of ZENYL. If I was a member
• 22:17
  Speaker 4: of a big Japanese group, I could drive a lot
• 22:20
  Speaker 4: of social status from being part of that group. And
• 22:23
  Speaker 4: people within the group are much closer to me than
• 22:25
  Speaker 4: people outside the group. And it's those different degrees of
• 22:28
  Speaker 4: relationship that have really driven a lot of those those
• 22:32
  Speaker 4: issues and changes in Japan. That the alignment within the
• 22:35
  Speaker 4: group is very, very strong, and I guess all of
• 22:38
  Speaker 4: the reforms around shareholders and corporate governance have been around
• 22:43
  Speaker 4: trying to increase the alignment between shareholders, and one of
• 22:47
  Speaker 4: the other sides would be is they break down That
• 22:49
  Speaker 4: those groups have kind of broken down a little bit.
• 22:52
  Speaker 4: So yes, say Honda effectively dissolve this relationship with the
• 22:58
  Speaker 4: number or reduced its relationship with an i'm ris key
• 23:00
  Speaker 4: suppliers because they weren't able to compete because they couldn't
• 23:04
  Speaker 4: get the right components and the right products and technology.
• 23:07
  Speaker 4: So they actually exited a number of positions they've reduced
• 23:11
  Speaker 4: their alliance on. That's on those group companies, and it's
• 23:14
  Speaker 4: a bit the same as some of the German companies
• 23:16
  Speaker 4: went through some of the nineteen nineties of this unwind
• 23:18
  Speaker 4: of what boutschland are gay and those group relationships and
• 23:22
  Speaker 4: structural relationships broke down are slightly straight away from the
• 23:25
  Speaker 4: trading companies slightly, but.
• 23:27
  Speaker 3: That was totally interesting. I would have interrupted. You have
• 23:30
  Speaker 3: been boringqteresing.
• 23:31
  Speaker 2: So let's take us back to the trading companies, so
• 23:34
  Speaker 2: that they're domestic and global companies. They're relatively inexpensive, and
• 23:38
  Speaker 2: they're fully invested in you know, they're going to be
• 23:42
  Speaker 2: big beneficiaries of the resurgence of Japan's economy, assuming we
• 23:45
  Speaker 2: think that's going to happen, and the resurgent of the market.
• 23:47
  Speaker 4: They do lots, They do lots and lots of different things,
• 23:49
  Speaker 4: so I guess the originally it was to bring in
• 23:51
  Speaker 4: these raw materials from overseas, to organize the logistics, to say,
• 23:55
  Speaker 4: work with group companies to help manage supply chains. But
• 23:58
  Speaker 4: over over time that's all have evolved into investing in
• 24:02
  Speaker 4: some infrastructure projects, being invested in a cable TV and
• 24:06
  Speaker 4: you as part of those groups, you know, organizing some
• 24:09
  Speaker 4: very complex large projects. So they have a lot of
• 24:11
  Speaker 4: safe project management skills. But also they formed partly like
• 24:15
  Speaker 4: a role a little bit like private equity in Japan
• 24:17
  Speaker 4: as well supporting new ideas and new ventures in Japan.
• 24:21
  Speaker 4: So they're very very connected in Japan, and they were
• 24:24
  Speaker 4: trading very cheaply. But what Warren Buffett has been doing
• 24:28
  Speaker 4: is he's actually been borrowing money in yen and then
• 24:31
  Speaker 4: buying some of these companies. And partly what he's noticed
• 24:34
  Speaker 4: is that the I guess, the spread between what these
• 24:37
  Speaker 4: companies are yielding in dividends and buybacks versus the funding
• 24:42
  Speaker 4: cost in yen has been massive. He's really saying equities
• 24:45
  Speaker 4: in Japan compared to the price of Japanese financing are
• 24:49
  Speaker 4: ridiculously cheap. That you know, you can borrow for one
• 24:52
  Speaker 4: percent and you can get a five, five, six seven
• 24:54
  Speaker 4: percent dividend yield, which for him was really attractive. He's also,
• 24:58
  Speaker 4: as a kind of indust operator able to go into
• 25:02
  Speaker 4: those companies who have these incredible connections throughout Japan and say,
• 25:07
  Speaker 4: are there any other areas where we can do business together?
• 25:10
  Speaker 4: So he's also got like as well as that purely
• 25:13
  Speaker 4: financial play, he's also got this operating play where he
• 25:17
  Speaker 4: may be able to find assets that other people want
• 25:21
  Speaker 4: to sell or where he can be introduced and they
• 25:24
  Speaker 4: can do other forms of business. But he's clearly you know,
• 25:26
  Speaker 4: his starting point is, you know, these are really cheaply
• 25:29
  Speaker 4: priced assets. The cash flows are really good, the balance
• 25:32
  Speaker 4: sheets are strong enough, and you know that their priced
• 25:36
  Speaker 4: far below the intrinsic value that they offer.
• 25:39
  Speaker 2: And one thing we're not going to do here is
• 25:40
  Speaker 2: recommend that our listeners go out and borrow in the
• 25:42
  Speaker 2: end to buy Japanese equity.
• 25:44
  Speaker 3: Listeners, please do not do that.
• 25:46
  Speaker 2: But the trading companies are worth buying on valuation brands
• 25:50
  Speaker 2: alone without borrowing to visit.
• 25:53
  Speaker 3: Yeah, yeah, and.
• 25:54
  Speaker 4: I think he's recently added to that position, so he
• 25:58
  Speaker 4: clearly clearly has a view.
• 26:02
  Speaker 3: Do you hold any of them in your portfolio?
• 26:05
  Speaker 2: You have two portfolios, right, Japan and Japan Income, so
• 26:08
  Speaker 2: two separate Japanese portfolios.
• 26:09
  Speaker 4: So we've got two funds at Japan Income Fund and
• 26:12
  Speaker 4: Luxembourg Fund, which is are originally named or Japan Fund.
• 26:17
  Speaker 4: We hold quite a few trading companies, but we don't
• 26:20
  Speaker 4: tend to hold the very big ones. We tend to
• 26:22
  Speaker 4: hold niche ones because it's not just that these very
• 26:26
  Speaker 4: large companies, but there's also other companies who involved in
• 26:28
  Speaker 4: example trading trading and doing religious six for drugs and cosmetics,
• 26:34
  Speaker 4: and electronics and a steel and a whole range of
• 26:38
  Speaker 4: other areas. So these trading companies are kind of middle
• 26:40
  Speaker 4: men in the Japanese market, basically easing the transactions between
• 26:46
  Speaker 4: large groups and say smaller either industrial companies or pharmacists
• 26:51
  Speaker 4: and people like that. So there's a lot of opportunity
• 26:53
  Speaker 4: for these companies within an economy as big as Japan
• 26:56
  Speaker 4: to kind of create quite a lot of value. And
• 26:58
  Speaker 4: what we're seeing is a lot of these companies historically
• 27:02
  Speaker 4: have been quite inefficiently run, and they're now beginning to consolidate,
• 27:08
  Speaker 4: and in the process, they're also realizing they've basically been
• 27:10
  Speaker 4: using far too much of their balance sheets, so very
• 27:14
  Speaker 4: very inefficient working capital management, or companies holding enormous cross
• 27:19
  Speaker 4: shareholdings amongst their business partners, and they're realizing that actually
• 27:24
  Speaker 4: this isn't necessary to run their business. And so some
• 27:26
  Speaker 4: of these companies might be trading for let's say, the
• 27:29
  Speaker 4: value of their equity portfolio, which we think is probably
• 27:32
  Speaker 4: too cheap.
• 27:33
  Speaker 3: Can you give us an example of a stock like that.
• 27:35
  Speaker 4: We own a drug wholesaler called Medipal, for example, and
• 27:39
  Speaker 4: effectively they they basically help manage logistics between the large
• 27:44
  Speaker 4: drug companies comes like Takeda, but also foreign companies like
• 27:48
  Speaker 4: a Fiser or someone like that, and the pharmacists and
• 27:52
  Speaker 4: hospitals in Japan, so the big dispensing pharmacy chains, so
• 27:56
  Speaker 4: they will help manage the logistics of that supply chain.
• 28:00
  Speaker 4: But as a result, they've historically held a large number
• 28:03
  Speaker 4: of shares in drug companies, in medical equipment companies, in
• 28:08
  Speaker 4: pharmacy companies, so basically so they've deployed their capital in
• 28:12
  Speaker 4: trying to build these relationships. And as that kind of
• 28:16
  Speaker 4: emphasis on capital relationships is becoming weaker and pressure from
• 28:19
  Speaker 4: shareholders becoming stronger, they're recognizing that actually the cost of
• 28:23
  Speaker 4: holding this capital and these relationships is very, very high,
• 28:27
  Speaker 4: and they say it's a process where these companies will
• 28:30
  Speaker 4: gradually sell down their shareholdings. But they're also finally accepting
• 28:35
  Speaker 4: that the amount of assets they have is too big
• 28:38
  Speaker 4: for their business size. And so the question we're having
• 28:41
  Speaker 4: really today is you know, this is your asset base,
• 28:44
  Speaker 4: what is necessary for your business? And then what is
• 28:47
  Speaker 4: the best way to deploy that extra capital? So is
• 28:50
  Speaker 4: it maybe to do M and A, is it to
• 28:53
  Speaker 4: grow your business organically? Is it maybe to do a
• 28:57
  Speaker 4: big dividend, or to buy back shares if the sh
• 29:00
  Speaker 4: are very very cheap. But the conversation, which has kind
• 29:03
  Speaker 4: of been catalyzed by the TESE is really what is
• 29:06
  Speaker 4: the appropriate size of your balance sheet?
• 29:09
  Speaker 2: And now there's definitely a very sharp rising buybacks in Japan, right,
• 29:13
  Speaker 2: So this is something that we haven't seen for a while.
• 29:15
  Speaker 3: It's American thing.
• 29:16
  Speaker 2: Buybacks, and now we're suddenly seeing a lot of Japanese
• 29:20
  Speaker 2: companies doing that.
• 29:22
  Speaker 4: So buybacks, if you got to go back over ten years,
• 29:25
  Speaker 4: will probably say five trillion any year, and dividends are
• 29:27
  Speaker 4: about the same, so to say ten trillion any year
• 29:30
  Speaker 4: in shareholder returns, I think this year it's going to
• 29:33
  Speaker 4: exceed forty trillion. So we've already seen a pretty big increase.
• 29:38
  Speaker 4: But actually at the same time, Japanese profitability has grown
• 29:41
  Speaker 4: a lot, so actually companies now have even kind of
• 29:44
  Speaker 4: more cash than they had at the beginning, so they
• 29:46
  Speaker 4: haven't been distributing all of their cash, and the balance
• 29:48
  Speaker 4: sheets have kept on growing. We still find that companies
• 29:51
  Speaker 4: often don't really understand why they're doing a buy back,
• 29:55
  Speaker 4: but they do know that they should be doing a
• 29:56
  Speaker 4: buy back, and what was say, what we've begun to
• 29:59
  Speaker 4: see is companies say, Okay, we accept we've got too
• 30:01
  Speaker 4: much money basically, and we are going to pay out
• 30:05
  Speaker 4: one hundred and twenty percent of our profits over the
• 30:07
  Speaker 4: next few years, or we're going to target more than
• 30:10
  Speaker 4: ten percent ROE. And with the reason our ROE is
• 30:13
  Speaker 4: low today is because we've got too many assets. So
• 30:16
  Speaker 4: some companies are beginning to understand that this kind of
• 30:18
  Speaker 4: excess non operating assets are actually hindering their returns because
• 30:23
  Speaker 4: the shareholder base has broken up a bit and you
• 30:25
  Speaker 4: have more active investors pushing companies incredibly hard on their
• 30:29
  Speaker 4: balance sheets and on their capital, and that's pressure is
• 30:33
  Speaker 4: beginning to make it self felt, not just in those
• 30:35
  Speaker 4: companies who under direct pressure, but under companies who fear
• 30:38
  Speaker 4: they may come under pressure. And I think that that's
• 30:41
  Speaker 4: causing them, along with strong encouragement from the Tokyo Stock
• 30:45
  Speaker 4: Exchange itself, for them to really look again at their
• 30:48
  Speaker 4: capital policy. And that's one reason this year we've seen
• 30:50
  Speaker 4: so many companies hike their dividends, do buybacks, and kind
• 30:54
  Speaker 4: of commit to higher levels of return going forward.
• 30:57
  Speaker 3: So good time to own a Japan income fund.
• 31:01
  Speaker 4: What's the yield on We definitely think so it's just
• 31:03
  Speaker 4: over three percent. We are hopeful running basis.
• 31:07
  Speaker 2: From market that everybody thinks produces no income whatsoever.
• 31:11
  Speaker 3: Three percent is not bad, is it.
• 31:13
  Speaker 4: We think you could, I mean, you could construct a
• 31:15
  Speaker 4: portfolio with a much higher running yield. But we also
• 31:19
  Speaker 4: as well as that three percent, we're normally expecting to
• 31:21
  Speaker 4: get probably another three or four percent in terms of
• 31:24
  Speaker 4: you know, buybacks as well. So it's not that's not
• 31:27
  Speaker 4: the total shareholder return. And in many cases we're expecting
• 31:31
  Speaker 4: those companies to continue to grow their dividend not just
• 31:34
  Speaker 4: in line with earnings, but faster than that. And there's
• 31:37
  Speaker 4: clearly quite a few companies that we own where there
• 31:40
  Speaker 4: will probably be let's say, extraordinary returns of capital as
• 31:44
  Speaker 4: they downsize their balance sheet and bring them in line
• 31:46
  Speaker 4: with with where the operation entity is. And there's definitely
• 31:50
  Speaker 4: quite a few companies where you know, you talk to
• 31:52
  Speaker 4: them and they have you know, ROIC targets, which obviously
• 31:56
  Speaker 4: is a Japanese companies. ROIC is not a new concept,
• 31:59
  Speaker 4: but something that most companies in Japan are not really
• 32:02
  Speaker 4: familiar with.
• 32:03
  Speaker 3: Sure, a lot of our listeners are not going to
• 32:05
  Speaker 3: be familiar with it.
• 32:07
  Speaker 4: So this is basically the return on the company's capital.
• 32:11
  Speaker 4: So it's not just the return on the equity but
• 32:12
  Speaker 4: on the whole company. So it's really about how efficiently
• 32:14
  Speaker 4: you're turning the assets you've got into profits. Some of
• 32:19
  Speaker 4: the companies we look at are looking at that against
• 32:21
  Speaker 4: how much it costs to kind of carry those assets,
• 32:23
  Speaker 4: the cost of capital, and they're saying, actually, we need
• 32:25
  Speaker 4: not just to cover the cost, we need to earn
• 32:28
  Speaker 4: like a positive spread. So we need to run our
• 32:31
  Speaker 4: business to exceed the cost of our capital. And when
• 32:35
  Speaker 4: use of run the numbers, either their profits have to
• 32:37
  Speaker 4: grow extraordinarily, which we would be quite happy about, or
• 32:41
  Speaker 4: they need to shrink their assets, and that would probably
• 32:43
  Speaker 4: mean in many cases big dividends. And so company I
• 32:48
  Speaker 4: think of at the moanent is actually committed to return
• 32:50
  Speaker 4: one hundred percent of its profits over the next three
• 32:52
  Speaker 4: years in dividends. But also it would probably mean that
• 32:56
  Speaker 4: they have to sell and shrink, you know, non core assets,
• 33:00
  Speaker 4: and that's something that you know, in Japan hasn't ever
• 33:02
  Speaker 4: happened before. So companies in Japan have mostly grown their
• 33:07
  Speaker 4: assets and have sort of often struggled to get out
• 33:11
  Speaker 4: of businesses that weren't doing very well, so I think
• 33:14
  Speaker 4: probably at the moment the focuses is on the balance sheet,
• 33:17
  Speaker 4: so bringing the balance sheet to the right size for
• 33:20
  Speaker 4: the operating company, and you can see that for example,
• 33:23
  Speaker 4: Sony has announced that it's going to spin out its
• 33:26
  Speaker 4: financial service business, and this is probably the first really
• 33:29
  Speaker 4: big example of a this kind of tax free spin
• 33:32
  Speaker 4: The government has been propos has talked about, but they've
• 33:35
  Speaker 4: kind of accepted it it. You know, the market of
• 33:38
  Speaker 4: discussion is that possibly Panasonic will do the same thing
• 33:42
  Speaker 4: with their battery business, which is one of the main
• 33:44
  Speaker 4: supplies for Tesla. But obviously that battery business is quite
• 33:47
  Speaker 4: different from a lot of their other businesses and actually
• 33:50
  Speaker 4: know to fund its growth because of the big growth
• 33:53
  Speaker 4: in evs over the next couple of years, it needs
• 33:55
  Speaker 4: to be spending a lot of money. But a lot
• 33:57
  Speaker 4: of the other bits of Panasonic probably you know, a
• 33:59
  Speaker 4: very very different and so if you were to look
• 34:02
  Speaker 4: at to say, a careering company that did something very similar,
• 34:05
  Speaker 4: their battery business trades a completely different way than the
• 34:08
  Speaker 4: rest of their business did historically. And I think this
• 34:10
  Speaker 4: is one of the issues Japanese firms have had, is
• 34:12
  Speaker 4: that you know, the internal needs of these different companies
• 34:16
  Speaker 4: have been very very different, and the managers have struggled
• 34:20
  Speaker 4: to combine, say, managing some business that are in decline,
• 34:24
  Speaker 4: some that are very very successful, and some that need
• 34:27
  Speaker 4: perhaps lots and lots of growth capex. But they've sort
• 34:30
  Speaker 4: of struggled to decide how to allocate resources internally, and
• 34:33
  Speaker 4: they haven't been able to be very dynamic in terms
• 34:35
  Speaker 4: of how they approach things because you've had to form
• 34:38
  Speaker 4: this consensus. And so creating more focused or agile companies
• 34:44
  Speaker 4: should improve the decision making and it should allow I
• 34:47
  Speaker 4: guess investors to say, we really like this high growth business,
• 34:50
  Speaker 4: will pay a high price for that. We not that
• 34:53
  Speaker 4: you know, we don't really like this other business, but
• 34:55
  Speaker 4: it's very stable and the dividends are great. And there
• 34:58
  Speaker 4: could be some businesses that maybe should be owned, say
• 35:00
  Speaker 4: by private equity, or should merge and consolidate with other companies,
• 35:05
  Speaker 4: and perhaps they're in sort of a managed decline where
• 35:08
  Speaker 4: you focus on generating cash flow and you focus on
• 35:11
  Speaker 4: generating efficiency rather than trying to grow the business any longer.
• 35:15
  Speaker 4: So these trying to do all of those things inside
• 35:19
  Speaker 4: one group is very very hard. And if we were
• 35:22
  Speaker 4: to look at Japanese firms. There's definitely a clear kind
• 35:25
  Speaker 4: of empirical evidence that more focused companies have better returns.
• 35:30
  Speaker 2: Okay, so there's a lot of a lot of movement
• 35:32
  Speaker 2: and a lot of change coming.
• 35:33
  Speaker 3: Yeah, listen, David. They ask you something that I don't
• 35:37
  Speaker 3: that I'm having trouble with.
• 35:39
  Speaker 2: Which is that the market as a whole has outperformed
• 35:42
  Speaker 2: really nicely.
• 35:43
  Speaker 3: Looks great. What I run down.
• 35:46
  Speaker 2: The performance from a lot of your competitors, A lot
• 35:49
  Speaker 2: of them are well, most of them are underperforming the market.
• 35:54
  Speaker 3: So after all these.
• 35:55
  Speaker 2: Years that they've had to spend picking out the best
• 35:58
  Speaker 2: stocks in Japan and waiting for the market to turn,
• 36:02
  Speaker 2: et cetera, and me writing endless articles about how Japan
• 36:05
  Speaker 2: as a stock pickers heaven, et cetera, they're still underperforming.
• 36:10
  Speaker 3: Why is that?
• 36:11
  Speaker 4: I think there are probably two reasons. The first of
• 36:16
  Speaker 4: which is that the market, because it's been so horrible
• 36:19
  Speaker 4: for so long, has actually kind of bifurcated into totally
• 36:24
  Speaker 4: passive management. So so you know, whether it's an ETF
• 36:28
  Speaker 4: for something, an active fund that's basically passive, so there's
• 36:31
  Speaker 4: no view and obviously with costs, that means you're probably underperform,
• 36:35
  Speaker 4: or you've had people had quite strong style biases who
• 36:38
  Speaker 4: you've gone for growth managers who invest in the new,
• 36:41
  Speaker 4: dynamic changing companies in Japan, which there are quite a lot,
• 36:45
  Speaker 4: but obviously.
• 36:45
  Speaker 2: There have been just as expensive as some of the
• 36:48
  Speaker 2: more expensive companies in the worst.
• 36:50
  Speaker 4: Right exactly, so some of the some cases, perhaps the
• 36:53
  Speaker 4: valuation as in the West, has got ahead of the reality.
• 36:57
  Speaker 4: And on the other side, you've had value which also
• 37:00
  Speaker 4: includes a lot of companies that are not doing very well,
• 37:03
  Speaker 4: that are not that exciting, and obviously in the last
• 37:06
  Speaker 4: you know, year or so, those companies have done well
• 37:09
  Speaker 4: until the last month a lot lot better, but they
• 37:13
  Speaker 4: had a pretty horrible five years before then. So you know,
• 37:17
  Speaker 4: so it's been a very tough market because you know,
• 37:19
  Speaker 4: you've either had that sort of style that you're investing
• 37:22
  Speaker 4: in your investors want you to buy or want to own,
• 37:25
  Speaker 4: and so you've ended up with investors having a growth
• 37:28
  Speaker 4: manager and a value manager, and they've both performed well
• 37:31
  Speaker 4: when their style has been in favor, but when their
• 37:34
  Speaker 4: file style is not in favor, they haven't. So by
• 37:36
  Speaker 4: combining the two you have still ended up with an
• 37:38
  Speaker 4: average return. But it's very hard because you've got to
• 37:41
  Speaker 4: pick you know, the market and the style at the
• 37:43
  Speaker 4: same time to get it right. But I think the
• 37:45
  Speaker 4: second factor as well is that the companies that benefit
• 37:48
  Speaker 4: most from this pressure and the corporate governance reforms are
• 37:52
  Speaker 4: almost the companies that you wouldn't have bought because the
• 37:55
  Speaker 4: management didn't care because returns were very, very low. So
• 37:59
  Speaker 4: you you kind of almost have to find those companies
• 38:02
  Speaker 4: who are wanting to change or willing to change and
• 38:08
  Speaker 4: really chase those, you know, look at the try and
• 38:11
  Speaker 4: find those companies and find the catalyst for what that
• 38:13
  Speaker 4: change is going to be. Now, sometimes that's you meet
• 38:16
  Speaker 4: the management team and they talk to you about what
• 38:18
  Speaker 4: they would like to achieve. Sometimes you see there's a
• 38:20
  Speaker 4: succession change between an old manager and a young manager
• 38:23
  Speaker 4: who's coming in with different perspective. But it's about those
• 38:27
  Speaker 4: companies who are changing and improving much more than it
• 38:30
  Speaker 4: is about some of those, you know, perhaps those legacy companies.
• 38:34
  Speaker 4: So it's been I think very hard for managers to
• 38:37
  Speaker 4: always to catch those unless they're explicitly focused on that,
• 38:41
  Speaker 4: and very few managers have that kind of mandate.
• 38:44
  Speaker 3: So they're just all bad stock pickers basically.
• 38:47
  Speaker 4: Yeah, I mean it's always the stock pickers market in
• 38:49
  Speaker 4: some way or other. It's just whether you picked the.
• 38:51
  Speaker 3: Right ones right back to your right ones.
• 38:55
  Speaker 2: If you had to go on holiday for five years
• 38:58
  Speaker 2: and hang on to maybe.
• 38:59
  Speaker 3: Two of the So in your portfolio, which ones do
• 39:01
  Speaker 3: you think you choose?
• 39:03
  Speaker 4: I mean one of our companies that we actually bought
• 39:06
  Speaker 4: of you at its Ipo, perhaps just well a year
• 39:09
  Speaker 4: and a half ago is a is a company that
• 39:13
  Speaker 4: specializes in producing private band water bottles water so for supermarkets,
• 39:18
  Speaker 4: convenience stores, and the management is extremely good. It's called
• 39:22
  Speaker 4: Life Drink. The management is extremely strong. They basically came
• 39:26
  Speaker 4: from a private ectory company. They basically rescued a Japanese
• 39:31
  Speaker 4: family firm that was struggling to compete and they refocused
• 39:36
  Speaker 4: the business. So even though it's quite a small business,
• 39:39
  Speaker 4: they have you know, they just have nine different products.
• 39:43
  Speaker 4: They've got still water, sparkling water, and tea in a small, medium,
• 39:47
  Speaker 4: in large size, so for each production line they have
• 39:50
  Speaker 4: really really big scale. And they are now in the
• 39:53
  Speaker 4: process of expanding their footprint, building more capacity, as they said,
• 39:58
  Speaker 4: filling out so geographically to Japan, and they're also going
• 40:02
  Speaker 4: to conduct we imagine some more m and A, and
• 40:04
  Speaker 4: we actually introduced them to one company they ended up buying,
• 40:08
  Speaker 4: or a subsidiary of another company they ended up buying.
• 40:11
  Speaker 4: And it's really a good case in point where they
• 40:13
  Speaker 4: were able to go to an asset that this other
• 40:15
  Speaker 4: firm was struggling to run and make it only marginally profitable.
• 40:20
  Speaker 4: They were able to buy it for a far below
• 40:22
  Speaker 4: replacement cost. They think they'll make a twenty percent return
• 40:25
  Speaker 4: under their business model. So it's really a case of
• 40:29
  Speaker 4: these assets moving from a sort of a week a
• 40:31
  Speaker 4: week in so not the best owner, to a better
• 40:35
  Speaker 4: owner of those assets. And in the process both parties
• 40:38
  Speaker 4: of one one company didn't know got cash, they didn't
• 40:41
  Speaker 4: have to close down the facility, they didn't have to
• 40:43
  Speaker 4: lay off the workers, and the other company was able
• 40:46
  Speaker 4: to acquire this asset and run it in a much
• 40:49
  Speaker 4: much better way, in a much better model, and make
• 40:52
  Speaker 4: really really good returns on it. And we think that
• 40:54
  Speaker 4: that kind of focusing in Japan is going to be
• 40:57
  Speaker 4: a really powerful force. It's not an ultra high growth company,
• 41:01
  Speaker 4: but it's probably going to grow between ten to fifteen
• 41:03
  Speaker 4: percent a year with very high profitability, and we think
• 41:06
  Speaker 4: that ultimately this will be reflected in a much higher
• 41:10
  Speaker 4: multiple for the company than it currently trades. That what
• 41:13
  Speaker 4: is current multiple it is currently well, depending on it's
• 41:17
  Speaker 4: currently doing a big share share placement. We think we
• 41:19
  Speaker 4: can get it down to a low double digit multiple
• 41:21
  Speaker 4: and we think it will probably end ultimately trade between
• 41:24
  Speaker 4: twenty to twenty five times, So we think it can
• 41:27
  Speaker 4: double again.
• 41:28
  Speaker 3: And if it was listed in the US, what do
• 41:30
  Speaker 3: you think it would trade.
• 41:30
  Speaker 4: On probably thirty times, I guess, I mean if we
• 41:36
  Speaker 4: were to think back as I mean, the way we
• 41:38
  Speaker 4: look at it is a very very stable core business.
• 41:42
  Speaker 4: We think that you know, that's very macro insensitive, and
• 41:46
  Speaker 4: we just think it has got a very very big
• 41:48
  Speaker 4: runway in terms of its ability to grow, to consolidate,
• 41:53
  Speaker 4: and to roll out, you know, to roll into adjacent categories.
• 41:57
  Speaker 4: For example, at the moment it doesn't do sports drinks,
• 41:59
  Speaker 4: but the asset it or has a lot of sports
• 42:01
  Speaker 4: drinks technology. That could be a big area which they
• 42:03
  Speaker 4: could again roll into the existing customer base across the
• 42:06
  Speaker 4: whole of their their footprint throughout Japan. And there's a
• 42:09
  Speaker 4: lot of sort of small incremental things they can do
• 42:12
  Speaker 4: to grow the profitability on it.
• 42:14
  Speaker 2: Okay, brilliant. Let me ask you, we're running out of time.
• 42:19
  Speaker 2: I've had you for far too long, But let me
• 42:21
  Speaker 2: ask you before we finish up. It all sounds wonderful.
• 42:24
  Speaker 2: This is a great story.
• 42:25
  Speaker 3: I love it. Cheap quality companies. What more would you
• 42:28
  Speaker 3: possibly want? Something is bound to derail that. Something always
• 42:31
  Speaker 3: derails great rallies in the Japanese market. What's it going
• 42:34
  Speaker 3: to be? What's the big risk here? What's going to mean?
• 42:36
  Speaker 3: Because we're going to listen to this conversation with you,
• 42:39
  Speaker 3: and lots of my.
• 42:39
  Speaker 2: Listeners are going to that's what I need. I need
• 42:41
  Speaker 2: a big part of Japanese stocks. We're going to go
• 42:43
  Speaker 2: out by a big part of Japanese stocks. I've been
• 42:45
  Speaker 2: here before, and.
• 42:46
  Speaker 3: The next thing they know, they're going to be losing money,
• 42:48
  Speaker 3: almost inevitable. What's the risk here? So?
• 42:51
  Speaker 4: I think that the biggest risk is that the government
• 42:53
  Speaker 4: decides that actually, you know, this is creating if you're
• 42:56
  Speaker 4: too much change and too much disruption, that actually, you know,
• 43:00
  Speaker 4: they don't want all these Japanese companies buying and selling
• 43:04
  Speaker 4: different assets and disrupting the social harmony in Japan. You
• 43:08
  Speaker 4: know what the Japanese government really wants is more successful
• 43:10
  Speaker 4: companies that pay workers better, so real wages in Japan,
• 43:14
  Speaker 4: which have been completely stagnant since nineteen ninety. I mean
• 43:18
  Speaker 4: literally they've gone nowhere for thirty years. They want them
• 43:22
  Speaker 4: to start going up, and so I guess there is
• 43:24
  Speaker 4: a risk that, you know, if they're not achieving that,
• 43:27
  Speaker 4: then they may look for some other measures and try
• 43:29
  Speaker 4: to go back to a kind of more state directed,
• 43:31
  Speaker 4: bureaucratically driven mode of kind of command and control. And
• 43:37
  Speaker 4: there's definitely no elements in the Japanese kind of corporate structure,
• 43:41
  Speaker 4: whether it's the kind of Japanese version of the CBI,
• 43:44
  Speaker 4: the caden Ran or you know, the Ministry of Trade
• 43:47
  Speaker 4: in Industry or Ministry of Finance, who are very you
• 43:52
  Speaker 4: could say conservative but almost reactionary, and that they want
• 43:56
  Speaker 4: to stay on top and to control everything. Actually, all
• 44:00
  Speaker 4: of this change in dynamism is undermines their power to
• 44:05
  Speaker 4: control things, and that means that you know, then don't
• 44:07
  Speaker 4: have the same level of influencing control that they used
• 44:09
  Speaker 4: to have. And I think you know that they like
• 44:12
  Speaker 4: running the show, and I guess if there's a sense
• 44:15
  Speaker 4: that it's really not working, that they will try to
• 44:17
  Speaker 4: reassert themselves and some of the companies who are under pressure.
• 44:21
  Speaker 4: I mean, it's not nice if you're a CEO and
• 44:24
  Speaker 4: a nasty activist fund appears at a five percent or
• 44:27
  Speaker 4: big shareholder and your shareholder list and then starts asking
• 44:31
  Speaker 4: you to run your business better, to hand over the cash.
• 44:34
  Speaker 4: I mean, it's your cash, not the shareholders. And you know,
• 44:37
  Speaker 4: the way of thinking for them is that you know,
• 44:40
  Speaker 4: this is that the managers is the managers and company
• 44:43
  Speaker 4: to some extent more than it is the shareholders, and
• 44:46
  Speaker 4: that change of who owns those companies isn't yet fully embedded.
• 44:51
  Speaker 4: And there are some really bitter struggles at the moment
• 44:55
  Speaker 4: over governance, and it's it's not entirely clear that you
• 45:00
  Speaker 4: know you're always going to win, and there you know,
• 45:02
  Speaker 4: there are some really really dirty fights going on around
• 45:08
  Speaker 4: and other things.
• 45:09
  Speaker 2: Yeah, and I absolutely love it that you think the
• 45:11
  Speaker 2: major risk here is that the changes too fast, when
• 45:14
  Speaker 2: this is about the slowest change anyone's ever seen, but
• 45:18
  Speaker 2: it still could conceivably be too fast.
• 45:21
  Speaker 3: Hy David. Last question this, do you have to answer
• 45:23
  Speaker 3: this in one word?
• 45:25
  Speaker 2: All right? Yeah?
• 45:26
  Speaker 3: Ready?
• 45:27
  Speaker 2: Yeah?
• 45:28
  Speaker 3: Bitcoin or gold?
• 45:30
  Speaker 4: Gold?
• 45:32
  Speaker 3: Okay, good answer.
• 45:34
  Speaker 2: One day someone's going to say bitcoin and then you
• 45:36
  Speaker 2: know a whole big row is going to kick off.
• 45:37
  Speaker 2: But so for every single person I've ever interviewed on
• 45:40
  Speaker 2: this podcast at least has said gold.
• 45:42
  Speaker 3: I think so. Maybe someone said bitcoin, I don't think so.
• 45:45
  Speaker 3: Enough Gold all the way, David.
• 45:46
  Speaker 2: Thank you so much, Thank you very much, thanks for
• 45:51
  Speaker 2: listening to this week's Marion Talks Money.
• 45:52
  Speaker 3: We'll be back next week in the meantime.
• 45:55
  Speaker 2: If you like our show, rate review and subscribe wherever
• 45:57
  Speaker 2: you listen to your podcast, and thank you very much.
• 45:59
  Speaker 2: By the way, those of you who have recently left
• 46:01
  Speaker 2: good reviews, we hugely appreciate them. This episode was hosted
• 46:05
  Speaker 2: by me Meren Somerset Web. It was produced by Someasadi
• 46:08
  Speaker 2: and Mohammad Faruk. Additional editing by Blake Maple. Special thanks
• 46:11
  Speaker 2: of course to David Mitchinson and tie John Steppe. And finally,
• 46:16
  Speaker 2: your weekly reminder, and it's an important reminder sign up
• 46:19
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• 46:22
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