John MacDougall, manager of Baillie Gifford’s Japanese Smaller Companies fund, reported being met with ‘derision and incredulity’ when telling people about his job. But he advised investors not to ‘tar all companies in Japan with the same brush’.
Jonathan Allum, an equity strategist at investment bank Mizuho International, opened a presentation on the country by asserting that the ‘strong conventional wisdom’ about Japan is ‘out of date’.
Whereas many investors view Japan as an industrial powerhouse in a death spiral, Allum noted that it is forging ahead into new export markets, such as music and tourism.
Just as the UK’s demise as a shipbuilder did not preface terminal decline, Allum did not expect dwindling manufacturing in Japan to indicate the country had nothing more to offer.
Several promising Japanese corporates were highlighted by Baillie Gifford’s fund managers.
Sarah Whitley, head of Japanese equities at Baillie Gifford, picked out Fuji Heavy Industries. The group’s key brand is Subaru, but Fuji is determined to keep it niche, targeting only a 1 per cent market share. It still makes 70 per cent of its cars in Japan, so Whitley foresaw its profit increasing ‘very far’ if the yen weakens from its current strength.
Fuji’s only drawback, Whitley said, was a capacity bottleneck, because it has been ‘so successful it has run out of manufacturing space’.
MacDougall chose M3 Inc, which he described as a ‘social network for doctors’. It connects pharmaceutical companies and doctors, charging the drug firms for marketing their products to medical professionals.
MacDougall claimed that in Japan ‘virtually all doctors have signed up’ to the service, which has flourished so much that it has been able to hike its prices. M3’s operating profit has risen 23 per cent a year since 2007, and is now expanding by acquisition in Europe and the US.
Investors looking for exposure to Japan will also be buoyed by what MacDougall called the ‘real de-rating’ of its firms, as price-to-earnings (P/E) ratios have fallen. Companies held by Baillie Gifford’s Japan and Shin Nippon investment trusts have an average P/E of 10.7 and 10.9 respectively, despite boasting earnings growth of 12.9 per cent and 16.4 per cent.
However, Baillie Gifford stressed that such opportunities were rare. The Shin Nippon trust overlaps by no more than 5 per cent with its index. Investors must, said Allum, ‘hack around in the undergrowth’.