Seeking ‘a sense of crisis’

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In contrast to managers seeking calmer shores amid the current market volatility, for Shigeru Aoyagi, manager of the £800m Nikko AM Japan Value fund, searching for a “sense of crisis” is a key part of his investment process.

“We want to know whether a firm’s management has the urgency to do something about their stock price,” he explains. “We want to see companies that would use that sense of crisis as a springboard to execute changes that will release the potential value of the company.”

Japan has had its fair share of crises over the last decade, and Mr Aoyagi is not alone in advocating a stock-picking approach to the markets. While the Nikkei 225 may have rallied in recent months, he believes drilling down into the detail of the markets remains the best way to find value.

Backed by deputy Takaaki Harashima, Mr Aoyagi oversees a portfolio of between 90-100 stocks, with annual turnover of approximately 30-40 per cent determined by a three-year investment policy. He was parachuted in as lead manager on January 30 2007 after long-term performance began to falter. According to Lipper, the fund has returned 9.4 per cent over three years, compared with an equivalent rise in the Topix 100 index of 18.2 per cent.

Mr Aoyagi focuses on undervalued, high-quality Japanese companies in industries with stable dynamics. Rigorous fundamental analysis is backed up by frequent company visits. Mr Aoyagi has even been known to eat in the staff cafeteria to determine employees’ morale and gauge sentiment towards management.

“We like to understand what the management and employees are trying to do,” he says, “and whether that will act as a catalyst to release value. Then we conduct research into the competition, service providers and the firm’s clients to try and have a very good understanding about that company before we invest.”

Mr Aoyagi is a keen advocate of accessing the wealth of untapped potential. “On an individual stock basis, there is a lot of unrealised value in Japanese companies,” he says.

“After the real estate bubble burst in the early 1990s many Japanese companies reduced excess debt capacity and cut staff, which has reduced their profit-loss breakeven point.”

Japanese companies have become leaner and more profitable, he continues. “There are certain companies that the market has priced correctly – and then we look to invest in the others.”

The subprime issue will also have an impact, he says. “But compared with a decade ago, when the Japanese economy’s reliance on America’s consumption was significant, it will be offset by demand from Brics [Brazil, Russia, India and China] and the emerging markets.”

For example, Japan is the only member of the G7 group of leading industrialised nations to have a trade surplus with China.

The Japanese markets may still seem opaque to foreign investors, but Mr Aoyagi insists there remain bargains for committed stock pickers. “Dividend payout ratios, stock buybacks and the breakeven point coming down have all been positive for the market. The divergence between the winners and the losers is going to be wider than in the past, so it is going to be a good stock-pickers’ market going forward.”

Hugo Greenhalgh is editor of Investment Adviser

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