Japan: Krig, Kina, Risiko og Teknologi

VIDEO: Vi snakket med Richard Kaye, forvalter av det gullvurderte Comgest Growth Japan-fondet, om problemer som berører Japan, ikke minst utsiktene til krig i Asia og Stillehavsområdet

James Gard 03.04.2023 | 17.03
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James Gard: Welcome to Morningstar. With me today is Richard Kaye. He is the Fund Manager of the Comgest Growth Japan Fund.

Welcome, Richard.

Richard Kaye: Hi, James. Thank you very much for having me.

JG: Not a problem. So, could you just give us a brief rundown of the fund's investment approach and its style, please?

RK: Great. Thank you. We invest in select group of companies, 30 to 40 only out of the 4,000 that are listed in Japan, and we like those companies to be what are called quality growth. I've got to say, I'm not a great person for labels, and I tend to define my approach rather as unique companies, invincible business models with a very clear growth trajectory ahead of them and managements that speak our language. And I don't just mean English, because we actually deal in Japanese. I mean people who understand shareholders' needs. Those are the parameters we look for in our fund.

JG: Sure. Fantastic. So, investors are very focused on U.S. and European banks at the moment, and they've probably taken their eye off the ball in terms of what's going in Japan. You're very fortunately based in Japan. So, what's going on there and what's the investor mood there?

RK: Yes. The problem of world banks, the Europe and U.S. issues recently, of course, have reverberated in Japan. The fears that Japan will have to copy the rest of the world in a more accommodative policy – Japan already has an accommodative monetary policy – will have to continue with that. The fears that Japan maybe has hidden asset problems, bad asset problems, just like these U.S. and European banks. Those fears, of course, are present in Japan and they're weighing on Japan bank stocks. We've had over a 20% decline in Japanese bank stocks in the last seven trading days. We don't hold bank shares in our portfolio. They don't really fit those parameters I mentioned earlier of unique companies with invincible business models.

So, I have to say the fear of sounding rather full of Schadenfreude the recent turmoil has helped our style. But there's a bigger question, of course, will growth be compromised because of these financial issues, and that's something we have to be careful about. Japan has had a difficult growth path over the last 10 years anyway. We try to invest in unique companies that can grow despite the macro issues.

JG: Yeah. So, Japan is not immune to the kind of wider global factors. So, in terms of secular growth trends, what are the things that we need to be looking out for?

RK: I think there are three major things, James, which are great opportunities for Japan investor, actually for a global investor who wants to invest in these things through Japanese equities, which are often cheap, liquid and under-researched and waiting to be discovered. The first of those themes is the reopening of the normalization of China, Asia in general. You all know the story of the messy end to zero COVID. We have a China fund for Chinese nationals who've been in China and out of China over the last few weeks. Reporting on the situation on the ground, it is a mess, but it is getting normal. And when it gets normal, the potential there is huge.

We in our Japan fund invest in that story through consumer stocks that play to the Chinese and the emerging market consumer and technology companies that help Chinese industry to become more sophisticated. Those two buckets of our China exposure have been a major area of the aggregate profit growth in our portfolio and actually of our alpha generation this year. So, the China reopening is a major theme.

Very quickly to other themes. Japan is an ageing society, which many people think is a bad thing. But we say actually it's a very exciting opportunity because companies that are improving workflow solutions, companies that are offering software or automation to deal with the labor shortage and companies that are addressing the consolidation of old industries that's being driven by the aging of managements. Those are very interesting themes. We invest in them in the fund. And very quickly lastly, technology is a global theme, not only limited to Japan, but there are many great technology companies in Japan that are not properly discovered values and we have many in our fund. And so, those three themes, China and Asia reopening, aging and technology are ones that we play quite heavily in this fund.

JG: Great. So, to pick up one of the themes, in terms of Japan and China, their fortunes are somewhat interlinked. But there is political risk in that region at the moment. How do you play that as an investor?

RK: It's a complicated question on the negative side. I have to say that Japan in its southernmost islands, the Okinawa island chain, is actually closer to Taiwan than those island chains are to Tokyo. Japan is hugely sensitive to the defense questions surrounding Taiwan. And Japan has recently significantly increased its defense budget in tandem with U.S. plans, of course. There's a very close military alliance between those two countries that's pertained for 70 years. So, all of those are elements of risk. On the other hand, I want to make clear that if there were ever to be a confrontation in that region, it wouldn't just be a Japan or an Asia problem. Every world market would be hit similarly.

And Japan is in a peculiar position that it actually benefits from the U.S. China tension in a number of areas. We have a company called Murata, for example, which makes components for iPhone. It's got the biggest share of building materials in an iPhone. Your phone is probably full of these Murata components for SAW filters, Wi-Fi antennas. They've won share in China from U.S. competitors because Chinese handset makers prefer to buy Japanese and American and there aren't any other choices. I can give you other examples. And so, the geopolitical tension is surprisingly good to Japan in some ways. And again, we've tried to capture this opportunity. Japan, because of its geopolitical position, because it's on the edge of the continent with a very powerful neighbour – in fact several powerful nuclear-armed neighbors, and it has no army technically – has always been diplomatically very astute, and that remains the case today.

JG: Sure. So, there is fear, but there's also opportunity.

RK: There's opportunity. 

JG: So, just as a final question, you mentioned technology. Japan is an innovator. Are there companies that are below the radar that Western investors will not have heard of?

RK: Yes, there are many. In our fund, we have a few. There's one called Dexerials, which is a rather unknown name in the West. In fact, even in Japan, it's not well-known. But they have a unique business supplying components that are mounted on thin film for Apple and Android devices. It's a very high growing company, very high return on capital company, a low-teens price to earnings ratio. And there are many similar ones that I could mention.

It's not quite technology. We have a company called Nissin Foods. They have a very special technology for vacuum maintenance in the pots there, which again is very cheap on global comparison, very high growth. And there are several other ideas where that came from of great companies, not so well-known, performing on the world stage and carrying the expertise of Japan to all sorts of regions, and we invest in those throughout this fund.

JG: Yeah. Those are fascinating examples. Well, thank you so much for your time, Richard. Much appreciated.

RK: It's a real pleasure. Thank you very much for your time and patience today.

JG: Thank you. For Morningstar, I'm James Gard.

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James Gard  is content editor for Morningstar.co.uk


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