Value investing - a Japanese case study


Despite the views of many in the market, value investing is not all about the economic cycle. It is about finding the idiosyncratic opportunities wherever they happen to crop up.

For the first time in a very long time, the market is being led by value and not growth. In this environment, it is important to understand there can be a big difference between what you get from a value factor and what you get from a bottom-up, fundamental, value investing style.

If there is one market that really epitomises the way in which value stocks come in all shapes and sizes, it would have to be Japan.

We've done a lot of work on Japan, and we have uncovered a broad array of opportunities. In the past 12-18 months or so, we have found classic company-specific turnarounds and added them to our portfolio. Two good examples are Nikon and Citizen Watch. Yes, they are battling with declining legacy businesses, but they are also in the process of revealing they have other great businesses under the bonnet.

For instance, while we all associate Nikon with cameras, it is also a market leader in a niche high-value lithography tool market. This technology is used in the manufacture of component parts of many electronic devices, such as smartphones.

Citizen Watch, meanwhile, has, in recent years, been gradually growing a high-margin precision equipment business, building equipment that can produce car parts for manufacturers. So much so that today, it is now actually bigger than their traditional watch business.

In both cases, we think the market is missing the value of their growing areas because it is focused solely on their legacy challenges. In this respect, important value has been missed.

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But that is not all. We have also found incredibly cheap auto suppliers in the form of NHK Spring and Tokai Rika. They both produce engine technology-agnostic products - like suspension springs and seatbelts - and they are trading on less than five times their 10 year average earnings.

We have also found some, quite frankly, ridiculously priced companies in the Japanese media sector. DeNA is a good example. Its main business is designing mobile games. In the past, it has struggled to come up with new titles, which has left its profit sharply down in recent years. But this is changing. It is now seeing success in Asia with a new game called Slam Dunk and has received a unique licence for Nintendo branded mobile games. As a result, it now has an outstandingly strong balance sheet. In fact, the vast majority of its market cap is covered by a major stake it holds in Nintendo – a fact which the market appears to have completely ignored.

Elsewhere in the media sector TV Asahi and Nippon TV have presented good opportunities. When we first looked at Nippon TV, its net cash and bond investments were worth more than the company's entire market cap. In effect, the market was paying you to buy the core operating business - and the operating business is not shabby either. It's one of Japan's leading broadcasters by market share, it is highly cash generative, and it even includes one of Japan's leading online streaming platforms - Hulu TV.

We consider the fact that you are being paid to buy that a pretty remarkable example of market inefficiency.

What is the point of listing the different opportunities that have come to light in Japan? This exercise brings to life what is meant when we say value comes in all shapes and sizes.

We don't consider value investing to be a one-dimensional macro bet. It's not all about interest rates or inflation, and indeed none of the investment cases outlined above have anything to do with interest rates or inflation. And it's not all about banks and energy companies and what happens there either.

True value investing is about hunting for cheap businesses, wherever they reside, to build a diverse portfolio for clients.

It's worth reflecting on what's happened in markets since Vaccine Monday in November 2020, when two pharmaceutical companies announced that they had successfully developed and would distribute COVID-19 vaccines.

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Of course, this is only (8/9 mths?) six months' worth of data – and this is not a long term time-frame to accurately measure returns. But what it does highlight is value has started leading the market.

We retain our conviction that value is a strategy for the long term – and it should not be treated simply as a temporary tactical opportunity.

Value is far more than the top-down homogeneous factor, and it could offer something hopefully more interesting and diverse than perhaps you might expect.

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