Structural changes “are creating similar opportunities in Japanese equities as existed in US equities in the 1980s,” he said. “US equities turned around in the 1980s when corporate America started improving productivity.”
Change and scarcity
Four Seasons Investments plans to launch a Japan equity fund this month with a long-only strategy and a bias towards small and mid-cap companies. The focus is on “change and scarcity” as a source of return, said Koda, a former Japanese equity portfolio manager at Goldman Sachs Asset Management.
He gives the example of Yamato Transport, a Japanese delivery service partnering with Amazon. Last year the company faced a severe shortage of drivers and told Amazon it had to increase the price of the service. “For 30 years it had not raised the price, and the proposal was an increase of 40% that Amazon had no choice but to accept,” he explained.
His fund aims to find companies undergoing similar changes – those forced to boost productivity due to ageing demographics and the domestic labour shortage. “If we don’t find change, we don’t make the investment. We especially pay attention to scarcity. If the idea is scarce, it is better.”
“Scarcity” refers to a situation when a company builds a ‘moat’ with a product or service that takes some years for competition to cross. Koda used the example of Apple’s iPhone 10 years ago, when it was a ground-breaking product and the only smartphone available.
“It is getting easier for us to find scarcity as a greater number of people are chasing a few famous Japanese stocks,” he added.
His firm’s Luxembourg-domiciled Ucits fund is expected to be launched this month in Europe. In Asia, the targeted investor base comprises institutions, family offices and high net worth individuals, but the products are not sold through private banks.
The firm also runs a Cayman-registered hedge fund, the Four Seasons Trust Fund, a long-short product focused on Japan.
Koda said the single biggest risk to his investment thesis is the global debt issue. Total global debt is now $169trn, up from $97trn just before the financial crisis began in 2008, according to McKinsey data.
However, he believes domestic companies undergoing structural changes have a low correlation to global debt issues. “That tends to be a positive factor when debt becomes a problem for the world.”
Additionally, he said he plans to avoid export-oriented stocks, which make up half of Japanese companies. “Those might be directly or indirectly affected by an acceleration of a trade war.”
Koda summarised his strategy as “finding change among neglected stocks, particularly stocks that have not historically outperformed the market.”
He added: “Normally such neglected stocks do not perform in a momentum-oriented market environment, when stocks which out-performed in the past, will [continue to] out-perform. Then [the fund] may have the risk of under-performance against competitors and the market index, even if you do not lose client money.”
Performance in Japan in 2018
After peaking at the beginning of the year, Japan’s equity market and Japan-focused funds have collapsed into negative territory, driven by concerns over global growth and tariff wars.