Über Comgest

Watch the full interview here

Transcript:

A NEW DAWN IN THE LAND OF RISING SUN

Japan can be a tricky market to invest in. What makes you and Comgest as a house overall, well placed to access it?

Thank you very much for that question. I think there are three major advantages that we, perhaps, perceive in our approach to Japan. One is, we have a long history with the country. We’ve had an office there for nearly 16 years. Many of us have lived in the country all of our lives. In my case, nearly 30 years, so over half of my life, just. That experience, that ability to be on the ground, to talk directly to Japanese companies is invaluable. There’s a second feature, I think Japanese people are somehow shy. They’re very private and they don’t talk about themselves very much.  
When you meet companies, they tend not to broadcast a story, but if you can go in and get to know a company well and they trust you as a capital partner, that relationship works well. There’s a third feature which I think we try to achieve at Comgest, which is to have a global perspective on Japan, as well as our local perspective. So, we hold quite a large weighting of Japan equity in our global unconstrained fund at Comgest.  

Can you dig into a little bit about what dynamics are at play in Japan at the moment and what’s your interpretation of them and what’s your outlook in the short-term future?

I think there are three major stories in terms of dynamics we have to focus on. One is that Japan is an excellent play on the growth of Asia. People may think that Asian stocks are the natural play for that story. We rather suggest that Japanese companies, because of their large exposure to the Asian consumer, the biggest consumer population in the world and the most rapidly growing, Japanese companies, likewise, Japanese companies in the technology area are supplying Asian industry with the tools for its innovation. For its larger value-added elements, for made in China. A lot of made in China actually is made in Japan. Japanese companies are the natural avenue to invest in the growth of Asia. We foresee that opportunity in our fund.  
A second element that’s very important is that the changing of Japanese society, women coming into the workforce. We actually have more people in work in-, more women in work in Japan, proportionately, than the US right now and that figure is growing. Changes like that. The aging society and the need of old industries to change, those are major investment opportunities and we pursue them, again, quite rigorously in our fund.  
A third factor is the technology revolution is well represented in Japanese equities. Japan has many leading technology companies. Not just the ones we always think about, that perhaps making some of the cameras on this interview, but one’s that are not well-known, even in Japan, but are doing excellent, unique things. They’re often undervalued on global comparisons because of that. Again, because of our local presence, we try to find those and capture their opportunity in the technology revolution.

How is the portfolio positioned at the moment?  How are you actually accessing some of those themes that you just mentioned there?

The China and Asia growth theme and the China reopening theme, of course, which goes on with that as China’s emerging from zero COVID, represents something like 20% of the market capitalisation of our fund. It’s consumer companies like UNIQLO. It’s also technology companies like FANUC, the world’s largest robot maker, which also is very involved with industrial machine innovation for Chinese and Asian industries become more sophisticated. Those represent about 20% of our fund.
Companies geared to the changing of Japanese society, are something like 25% of our fund. Medical portal company, M3 or a merger broker company that works with small companies that want to be bought out by larger companies for efficiency reasons. That’s another large portion of the fund.
The other portions of our fund are technology plays which are really geared to global technology innovation in semiconductor or automation. Then we have a number of other quite interesting themes like renewable energy, where we have two or three companies with very large global positions, actually, in renewable energy technology.  Where Japan is something of a leader, although as ever, is not very vocal about that.

Why do you think it’s the right time for your strategy then, in particular?

I think that reawakening of interest, the ability to research on the ground again, is going to be very important for capital flows into Japan, including for the great companies that we look at.

Are there a new set of challenges emerging for investing in Japan?

I think that there are a number of things that investors are looking at.
One is the idea that Japan may have to raise interest rates and the accommodative monetary policy which has reigned in Japan for over ten years may be at an end. Even if rates were to rise in Japan, a lot of the companies we invest in have little or no debt. Our average debt equity across the fund is was below the industry average.
Another thing that people worry about, of course, is the geopolitical tensions with China and Taiwan. Taiwan being very close to Okinawa, the southern islands of the Japanese archipelago. Japan, of course, is increasing its defense budget, as has been well noted. They depend very closely on the US military alliance. These are not problems only for Japan. If there are problems in that region, they’ll be reflected in equity markets globally.
The third issue, like in any country, is political change.  

It's been said that investing in Japan can be investing in the future. You think that investors really should have a constant allocation to Japan. Why is that on both sides of the question, I suppose?

The reason for a constant allocation is that Japan is a global market. It’s a great way to access the growth of Asia, especially, but even of western economies through Japanese technology and Japanese brands that are sold into those markets. You can access those themes at a less expensive price, at a cheaper valuation than in other markets. That is a reason for a constant allocation in Japan. Right now is a great time, again, because foreigners are coming back and starting to look at Japan after a four-year hiatus.
Also, I think because the Japanese domestic institutional investor, really, for the first time in a general is starting to allocate to the local markets. That’s because of a variety of changes in the pension industry in Japan, which are forcing that new focus. You therefore, have two natural sources of incremental interest, foreigners and domestics in a market that’s ripe for investing to begin with.