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Quaero bets on Japan industry consolidation

Japanese domestic industry sectors will undergo consolidation, which will allow industry leaders to gain market share, argues portfolio manager Rupert Kimber.
Quaero bets on Japan industry consolidation

Kimber manages the Tiburon Taiko Fund, a product that the Swiss firm Quaero Capital acquired when it bought Tiburon Partners earlier this year.

The fund’s investment theme is based on the belief that domestic sectors will undergo change and that market share will consolidate around leaders, Kimber told FSA.

The Japanese government sent the message to industry that consolidation is necessary when authorities approved the 2012 merger of Nippon Steel and Sumitomo Metal, he said. As a result, certain domestic sectors have undergone M&A activity since then.

“The story from here is this consolidation in these domestic sectors,” he said. “Japan’s small caps, in particular, are under real pressure. Their costs are too high, they are losing people, there is downsizing in capacity and this is not priced into the market.”

Private equity firms have raised substantial capital and are putting it to work buying companies in transition or in distress. “That’s worrying to a lot of companies,” Kimber said.

He believes industry consolidation can now take place without economic weakness. “The cost pressure on these weaker companies is so great and they don’t have the productivity improvements, so that will act as a constant driver.

“Consolidation is a relatively bullet-proof investment thesis because it is long term,” Kimber said. “If you get it half right, it should deliver tremendous results.”

High conviction

Kimber’s Tiburon Taiko Fund is a highly concentrated portfolio. It has some positions in multinationals, but the bias is toward small caps. It can hold a maximum of 30 names. Kimber said he aims to invest only in high return stocks.

“We don’t buy companies unless we think we can make 25% over a minimum of two years,” Kimber said.

Currently the portfolio has about 28 positions, ten of which have been held for nine years. The annual turnover of stocks was only 0.17x (to March 2018).

“If you trade too much then you end up renting the securities,” said Kimber. “You’re not really invested in them.”

Kimber added that he only takes positions in the leading companies in an industry. He avoids certain sectors, such as pharmaceuticals, because of the complexity of the business. Currently, the top holding in the fund is Tokio Marine.

Kimber bases his investment decisions on the degree to which a company can materially enhance its industry position, free cash flow and valuations. He also visits company management, competitors and suppliers.

He sells a company when it reaches a target price, but he doesn’t trade around it. “We review the target price but we don’t say, `it’s had a very good run, so time to take some money out and buy it back later on.’”

Kimber said that he also has a “substantial” personal investment in his own fund, which he believes aligns his interest with that of investors. He also loses his own money when he makes a mistake, and he hasn’t always been right.

Some years ago, he bought Panasonic because it had acquired Sanyo Electric, which had deferred taxes off the balance sheet. That made his estimation of Panasonic much higher than the market’s, and after many meetings with management, he decided the market would eventually raise the valuation.

The way to utilise the off-balance-sheet deferred tax losses was by merging Sanyo with the parent business of Panasonic. However, Kimber later found out that it wouldn’t happen because the worker wage level difference between the two companies was too big.

When it was clear that his valuation estimate wouldn’t pan out, he sold the position outright at a 25% loss. “I manage a portfolio but I am also an investor in the fund. I can’t think about carrying a passenger, I just cut it.”


The Tiburon Taiko Fund vs the benchmark and sector over three years.

Source: FE. Fund NAVs and index are converted to US dollars for comparison purposes.
The Tiburon Taiko Fund is only available for sale to professional investors.

Part of the Mark Allen Group.