Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Better governance helps Japanese market
While Japan has long been anathema to western investors, a series of corporate governance reforms are fueling renewed interest in the country.
Japan’s status as a technologically advanced country with a happy, healthy population has long belied its stagnating economy and uncompetitive corporate landscape that has seen a slow grind downwards for markets since the 1990s asset price bubble.
But while it is usually the demographic timebomb of an aging population and glacial wage growth that keeps investors away, some instos are underweight Japan due to simple language barriers.
Andrew Nolan, managing director of Eleuthera Investments, says: “Only recently did the regulator start pushing companies to provide disclosures in English. While there might be great opportunities to invest in Japan, if that information isn’t readily accessible in English than it’s put in the ‘too hard’ basket, and they look for opportunities elsewhere.”
The change is part of a broader set of corporate governance reforms aimed at increasing responsibility from management and dialogue between companies and their shareholders that have been gradually introduced since 2015.
The reforms were motivated in part by then-Prime Minister Shinzo Abe’s wider push to revitalize Japan’s stagnating economy, and have emboldened a wave of foreign activist investors, including Oasis Management, for which Eleuthera handles Australasian distribution.
One of Oasis’ activist campaigns saw it raise its stake in the Tokyo Dome Corporation to nearly 10 per cent and release an 80-page document demanding management to invest in digital signage and sponsorship at the stadium and modernise the attached hotel and amusement park. Oasis later called on shareholders to support its resolution to dismiss the company’s president, Tsutomu Nagaoka, for failing to “utilize the company’s assets effectively and extract the company’s intrinsic value.” While Tokyo Dome has since been delisted, the campaign attracted significant attention both inside and outside Japan.
“We’ve been talking about changes to corporate governance in Japan for 20 years, and I think there a lot of investors who have given up,” Nolan said. “I would argue that in the last four or five years, with the introduction of the corporate governance code and other regulations that are designed to be more shareholder friendly, that there are some fundamental shifts taking place.”
“What’s going on in Japan is effectively a change of mindset. Historically, shareholders haven’t necessarily been seen as the most important stakeholder. In New York you see corporate leaders say they need to think about the community and other stakeholders, whereas in Japan they’re starting at the other end of the spectrum.”
The code has seen a substantial increase in the number of independent directors on boards – more than 58 per cent have one-third independent directors, rising from under 10 per cent prior to the code’s introduction – and a greater focus on profitability and dividend payouts. And while even Japanese analysts will ignore the large amounts of cash on company balance sheets because they don’t expect it to be used, Nolan says there is a burgeoning appetite for M&A.
Cross shareholding – a system of interlocking share ownership, often between Japanese banks and their corporate customers – is also a target for the corporate governance code. The practice emerged from the attempted post-war breakup of the zaibatusu, family-owned industrial conglomerates, whose shares were distributed to the general population and later bought en masse by financial institutions, while a heavily reliance on bank finance in the 1960s further entrenched cross shareholding. But pressure is also now being applied by proxy advisers like ISS, which recommended investors vote against directors at companies where cross shareholdings are greater than 10 per cent of net assets.
Nolan said: “We’ve had Sumitomo Mitsui Trust Bank announce that it will unwind all its cross shareholdings, which is a massive change from one of the biggest and most well-known Japanese companies…the pressure is mounting on companies to address that.”
