In a world flush with debt, look to Japan says Schroders
After being a dirty word for close to a decade, ‘value’ investing has been back in vogue, for a few months at least anyway. Spurred on by the approval of COVID-19 vaccines in late 2020 the ‘recovery’ trade which involved increasing exposure to cyclical sectors like energy and banks has paid off in the short-term at least. So much so that it has become the near consensus of most investment managers.
Yet according to long-time value investors at Schroder’s “value investing is not all about the economic cycle” rather it is about finding the “idiosyncratic opportunities” wherever they happen to be. Following along this line, well known growth managers have also commenting suggesting that popular cyclical and energy companies are a ‘trade’ not a strategy.
Simon Adler, portfolio manager of the aptly named Global Recovery Fund, has had a strong year delivering a return of 49 per cent for the 12 months to 31 July, outperforming the benchmark by close to 18 per cent. In recent months the group has been increasing their exposure to Japanese equities, taking it to 13 per cent close to double that of the index.
Adler say Japan is the “one market that really epitomised the way in which value stocks come in all shapes and sizes”. The team are excited by a number of turnaround stories and underappreciated businesses that have chosen to pivot despite facing declining legacy businesses; not unlike what many Australian businesses are facing.
“We think the market is missing the value of their growing areas because it is focused solely on their legacy challenges” he explains when referring to Nikon and Citizen Watch two recent additions to the portfolio. Whilst Nikon is associated with the declining sale of cameras, it has quietly become a niche leader in the lithography tool market a key part of the semiconductor process.
Citizen Watch on the other hand has been building a high margin precision equipment business, building car parts for manufacturers, along way from the vintage style watches they are famous form. This precision business has in fact become larger than their watch sales.
The opportunities don’t end at technically challenged business with Adler also highlighting a number of ‘ridiculously priced companies in the Japanese media sector’. Whilst all attention is paid to the likes of Tencent and Electronic Arts, DeNA is seeing massive success with a new game called Slam Dunk whilst also obtaining a license to produce games for industry giant Nintendo. In true value style, the majority of DeNA’s market cap is said to be covered by a shareholding in Nintendo itself.
Traditional media is also reflecting a ‘pretty remarkable example of market inefficiency’ with a number of TV stations and streaming services trading below the value of their cash and bond investments. On this, Adler reiterates that valuing investing “isn’t all about interest rates and inflation” nor is it “a one-dimensional macro bet” it’s closer to a way of life.