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Pokémon no-no – Sometimes the market can end up doing the right thing for the wrong reason

09/08/2016

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

We may make a virtue of steering clear of trends, fads and crazes, here on The Value Perspective, but we are still more than happy to commandeer one for an article if they help us make a point. And so to the standard-bearer – for now – of so-called ‘augmented reality’ games, Pokémon Go, in which players use their mobile devices to find and ‘capture’ cartoon characters in the real world.

A kind of reverse of elements of Mary Poppins and Bedknobs and Broomsticks then, the game has become a worldwide phenomenon. Only released at the start of July, the app has already been downloaded millions of times and, predictably enough, many companies with a connection to Pokémon Go – no matter how tenuous – have been enjoying a boost to their share price performance.

Take, for example, McDonalds Holdings Japan. In spite of average earnings over the last decade of precisely zero, this ¥410bn (£3bn) business has seen its share price jump around 30% in recent weeks. And much as we try and avoid backfilling reasons for events, as we discussed in Just because, this does seem largely due to the company’s decision to distribute Pokémon Go merchandise with Happy Meals.

Here on The Value Perspective, we remain less convinced than the wider market appears to be that this development will be enough by itself to revolutionise the business’s long-term prospects. Still, as it happens, we do hold a position in another company – Japanese broadcaster Fuji Media – which has also enjoyed a 30%-odd share price increase, ostensibly on the back of a Pokémon Go connection.

In addition to its broadcasting interests, Fuji Media has an extensive investment portfolio and, last October, it was one of four companies to invest ¥2bn in Niantic, the US software developer behind a number of games, including you-know-what. So was it this quarter share of a ¥2bn investment that encouraged us to take a stake in Fuji Media? That would be a ‘Pokémon No’.

Fuji Media has a market capitalisation of around ¥290bn so it would need to see an extraordinary return on its Niantic investment to justify such a large rise in its share price. What we found much more interesting, here on The Value Perspective, was the ¥375bn of investments and marketable securities and the ¥374bn of property assets the company owns.

Yes, Fuji Media also has some debt but not so much as to spoil this exciting prospect of not one but two huge and undervalued investment portfolios. For some investors, that may not be quite as exciting as the spivviest trend of the moment but it is likely to serve one’s own portfolio a good deal better over the longer term.

This is, then, a striking example of much of the market doing the right thing for the wrong reason. Like the next person who bumps into you because they were glued to a screen in the hope of capturing yet another Jigglypuff, investors can lose sight of what is important. Here on The Value Perspective, though, our job is to capture returns, which requires a firm focus on a reality augmented only by value.

Author

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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