Trends Watch: Japan

October 08, 2020

By Elana Margulies-Snyderman 

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with John Trammell, Managing Director, Symphony Financial Partners.

What is your outlook for hedge funds?

We are likely to have higher market volatility for an extended period of time, and different from what we experienced in last decade. The longer period of volatility will lend itself to a better appreciation of active management as opposed to passive management and active management lends itself to a broad swath of alternative investors.

What are the greatest opportunities you see and why?

I believe the greatest opportunities today are in the value factor of investing, whether you think of it in terms of U.S. equities or the wider world; and more specifically in small and mid-cap Japanese equities. Many people aren’t aware that of the 4000 listed equities in Japan, a little more than 3600 of them have a market capitalization of less than a billion dollars. By any definition, that means that 85% of Japan’s stock market are in small and mid-cap names which are not only unfollowed by analysts but also unknown by most investors.

The first things people would say about Japan is that it has slim to no economic growth, deflationary tendencies, and the demographics are poor. Investors point to the ‘lost decades’ and their experience with the Japanese value trap over last 30 years. If investors want to think of it this way, Symphony Financial Partners is one of the best value trap escape artists of the last two decades. Despite this success, and more importantly for all investors, is that Japan is changing quickly (at least by Japanese standards). Influenced not just by the Stewardship and Governance Codes adopted in recent years, there is momentum among Japanese management teams of putting balance sheet cash to work, to become better investors and better stewards of capital. There is also a generational attitude change toward mergers and acquisitions that is gaining momentum in Japan.  

This change in momentum is backed up by a mountain of cash. Many investors fail to remember how wealthy Japan is. If you look at the 4000 listed companies in Japan, there is over $5 trillion in cash on their balance sheets. Many investors outside of Japan see this as a misallocation of capital and a waste of resources. But the Japanese are happy with their business model that supports employees, customers and suppliers through economic doldrums.

The Government Pension Investment Fund (GPIF), Japan’s largest pension scheme, owns more than 3% of nearly every publicly listed equity in Japan. Theirs is a strong voice for continued reform in Japan and more emphasis on shareholder recognition and rights. It is ironic that as Japan begins to embrace shareholders, here in America we have begun a discussion that tends toward more stakeholder inclusion and less shareholder exclusivity. For these reasons, and many more, I believe that Japan will be a great surprise to many investors across the next decade and longer.

What are the greatest challenges you face and why?

The greatest challenges are some investors in large Japanese companies have realized it is challenging to vote their shares. Most recently, Sumitomo Mitsui Trust Bank admitted it had failed to count some shareholder votes ahead of the annual meetings of about 1,000 companies. It initially cited procedural mistakes for the errors but later confirmed that 1,139 voting forms were invalidated. In addition, an activist fund complained that its hefty bloc of 5 million votes (1.1% of outstanding shares) had not been counted at Toshiba’s annual meeting on July 31.

The real problem stems from Japan’s antiquated voting and custody processes. Not only is there a problem with Japan’s system of postal ballots, but the country’s in-person voting is archaic. Shareholders in attendance at the shareholder meetings vote by clapping approval for an agenda item or sitting silent to show disapproval. Unfortunately, this can lead to confusion and missed opportunities. Voting problems affect foreign and domestic shareholders alike, but those domiciled outside Japan are at a major disadvantage in both receiving their proxy statements, which often arrive late, and exercising their voting rights. Most of these problems can be resolved through digital systems, and online voting would vastly improve Japanese corporate governance and voting transparency.

What keeps you up at night?

A non-peaceful transition of power here in the U.S. after the presidential election would be devastating to markets.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper LLP.

About Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.