Review: Investing in Japan

The Shareholder Activist - Review: Investing in JapanInvesting in Japan by Steven Towns carries the subtitle, “There is no stock market as undervalued and as misunderstood as Japan.” Towns might be right. He guides the reader to plenty of undervalued companies but will their underlying value be eventually recognized? There is a dearth of activism, especially given relatively strong shareowner rights. I’m not about to plunge into a broad index of Japanese companies but honing in on a few unappreciated gems and working to unlock value looks like it could be rewarding.

Towns briefly covers the basics of value investing before plunging us into the mysteries of the TOPIX (1&2) Mothers, and JASDAQ. If you are at all thinking about investing in mutual funds, ETFs, ADRs, etc., Towns’ advice could easily save you the price of the book on your first buy. It seems that much of the market is traded very thinly, especially domestically. Among the largest funds, there is not a single one, besides the Nikkei 225 and TOPIX index funds that focus on a domestic equity strategy. Compare that to the US, where there are probably more funds than stocks. Towns warns us that sales loads and fund fees often average more than 4%, so even strong performance fails to attract interest from domestic investors.

Turning to stocks, “coverage of stocks has been on the decline, meaning ever fewer professionals are evaluating stocks based on fundamental value. Unlike developing markets, market measures are plentiful in Japan. One that looks interesting is the Dividend Focus 100 Index, well worth reviewing for its constituents.”Towns goes into several market features that act as obstacles to investment, such as shares with multi-thousand dollar per share prices, apparently set to avoid extortion by sokaiya (corporate racketeers) who would buy a single share and threaten to disrupt the AGM. I was already familiar with companies holding their meetings on the same day to minimize such disruptions but wasn’t aware of the shift to higher prices stock to avoid infiltration.

This has somewhat been addressed by the issuance of “mini shares,” price more like most US stocks. However, you can’t place limit orders on such stocks, they don’t receive voting rights and you don’t get some of the shareowner perks available to holders of regular shares. Advises Towns, “reducing and/or eliminating minimum trading units would bode well for broader and deeper market participation.” A 2010 article reported that about 15% of stocks listed on Japan’s three emerging markets were untraded more than half of each month. Towns goes into some of the intricacies of parent and subsidiary listings, as well as cross shareholdings. Interesting that some subsidiaries are worth almost as much as the parent company.

Cross-shareowning has dropped considerably and Towns advises:

“Value and activist investors may find great investment opportunities by identifying undervalued companies that have equity holdings unrelated to their core businesses that can be sold.”

Kagome became a favorite of retail Japanese investors by spicing up its annual meetings, turning them into focus sessions and hosting annual buffet parties. I’d like to see that kind of shift at US companies, instead of moving to lockout meetings where shareowners get a virtual-only experience.

Most fascinating for me is the brief descriptions Towns provides of various activists efforts, including his own, demonstrating that value can be unlocked. So far, it looks like activism is mostly coming from abroad. Overseas investors now account for a quarter to a third of the market and two thirds of daily trading.

With less than 4% of Japanese individuals’ assets in equities, I’m guessing the whole market could move under the right circumstances. (That’s my guess, not that of Towns.) Shareowner rights are certainly there for those who own at least one minimum unit. Elections are determined by majority vote, cumulative voting can be requested, shareowner lists are more readily available, meetings more easily called and several more important rights bode well for future battles.

At one point, Towns even seeks alliances in “friendly” activist efforts at a specific company. As a fellow member of the United States Proxy Exchange, I may just join him. Now, if I can only find similar books for  investing in China, India, Indonesia, Brazil, Chile, etc. While those markets aren’t as undervalued or misunderstood as Japan’s, they are mysterious to most of us. At least I now feel a lot more educated about Japanese markets, thanks to Steven Towns.

To contact James McRitchie directly, please email jm@corpgov.net

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