A portfolio manager discusses the recent evolution among some Japanese companies toward a more shareholder-friendly management strategy.
Matt Miller: Gerald, there’s lots of interest in Japan and this sense that, while they may have gone through a couple of decades of this incredible stagnation — and something that’s been frustrating to a generation, I think, of Japanese and those who watch Japan — that something different is happening now, not just with what the central bank is doing but also on the corporate governance side in a way that matters for investors. Can you talk about that a bit?
Gerald Du Manoir: Yes. Well, what’s intriguing about what’s going on in Japan is for the first time in my investment career certainly, it is no longer about being invested in Japan or being out of Japan. For the first time, you actually have a true distinction between companies that are behaving in a — as you said — much more shareholder-friendly point of view and companies that are still engrossed in their old-fashioned way of managing the business.
That has really changed the way that the Japanese market has evolved. And although the Nikkei has done extremely well in light of the very friendly macroeconomic policy from Prime Minister Abe and the central bank there, at the same time you’ve seen again this divergence of company valuation where the companies that are highlighting a policy where they wish to distribute more dividends — where they’re going to be more disciplined on their return on equity, where they’re simplifying the very complex structure that some of the holding company structure was historically true in Japan — those companies are being bid up very aggressively. And at the same time, you have a whole tail of companies that, if you will, are not yet getting it, and as such, those are being “devalued.”
That’s a very, very big change in the way that companies are being run, and as such, I always encourage my colleagues to think about Japan no longer as being this area where you allocate capital to but a place where you can shop for great companies now.
Matt Miller: So Gerald, with that — obviously without making specific investment recommendations — can you give us some examples to give folks a feel of the kind of changes you’re talking about?
Gerald Du Manoir: Well, there’s a company that I think highlights this trend in the most vivid way. It’s a company that is the world leader in automation. It used to be very well known for manufacturing robots that were then used in the auto manufacturing industry. The company is FANUC. It has a very long history of being very conservative and incredibly disciplined in how it manages balance sheet. As a result, it — at its peak — had as much as a fifth of its balance sheet in cash, literally just sitting cash. Now as my colleagues can attest, cash in Japan is not really rewarded, considering the zero interest rate policy that goes on there.
But the reality is, as the company evolved and the management realized that installing a way to use that cash in a more shareholder-friendly way and distributing that cash in the form of dividends, they have now put in place a very different governance structure, which is actually aiming at establishing a payout ratio of that cash and of future earnings. That is a gigantic change from what you would have seen as early as, say, a year or two ago. That is a gigantic change from what you would have seen as early as, say, a year or two ago. I mean, we’re not talking 10 years ago.
Matt Miller: Even though it’s common in many Western companies?
Gerald Du Manoir: Even though in most Western companies — particularly in companies that are so cash-generative — that would be quite the common behavior.
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