Jonathan Ramsay

 So Jamie, thanks very much for taking some time. Just wanted to ask you a few questions about your strategy and an area of the world that we've becoming increasingly interested in. I'm not sure if that's a good thing or not, but I'm sure you'll tell me. You run the Platinum Japan fund. Is that an area that we should be interested in investing in, despite some of the headlines sometimes and some of the feelings that people might have about investing in Japan.

Jamie Halse

Japan is a bit of a polarising topic because people think of the lost decades in Japan. And they tend to overlook the fact that stock prices have actually done very well in Japan in the last decade or more since the “Abe-nomics” reforms under the late, former Prime Minister.

So we're seeing a lot of reforms in corporate governance. We've seen big improvements in cash returns to shareholders as a result of that, an, big pushes from government agencies and the stock exchange to really improve the returns on capital and profitability that Japanese companies generate.

And so that's actually delivered earnings growth that's reasonably similar to what you've experienced in the US, meanwhile, valuations in Japan are significantly de-rated relative to the US. So we think that's a pretty good starting point from which to start exploring for investment opportunities.

Jonathan Ramsay

We've been observing that for a while. And as you said, share prices have been okay in line with the world, but it’s the earnings underneath that have been especially strong. Cheap has been getting cheaper and corporate Japan, as you said, various catalysts at the corporate level have been seeping through from that sort of Abe-nomics regime.

The share prices themselves haven't really been set alight compared to the rest of the world, until quite recently. And everyone's been waiting for a catalyst. So the fundamentals have been getting better, but what's the catalyst because there's been some pretty dire sentiment around Japan. Is it as simple as someone like Warren Buffett getting interested in the area or was there something else going on?

Jamie Halse

He's actually been interested for a while, but I think most recently he visited Japan at the start of April and that’s ignited all this media attention and following that, we've seen foreign investors buying of Japanese equities really pick up. So I think that's an interesting catalyst for right now, but we've also seen a lot of the reforms really start to snowball. And I think we've reached a tipping point. So earlier this year, the Tokyo stock exchange came out and said they would push management teams to focus on profitability and increasing corporate value so that stocks trade above their book value, which implies that book value actually adds economic value. And so that's shamed a lot of companies into coming out and dramatically increasing their targets for returns on equity. It's pushed them into doing big stock buybacks and increasing dividend payouts. On top of that there was some discussion around whether the new bank of Japan Governor might actually move away from some of the more loose monetary policy. But I think, he's allayed concerns in that regard. He's come on board and is doing a study of the overall monetary policy situation, but essentially that's pushed out any changes to short term interest rates and the cap that they’ve put on that 10-year yield at 50 basis points. They’ve pushed that out for at least about a year, maybe 18 months.

Jonathan Ramsay

You've actually taken us to somewhere that I wanted to talk about. And it's probably more on the negative side to be fair. Is that, with the highest debt to GDP ratio in the world, people have bet against Japan for a long time, for reasonably good fundamental reasons. The UK sort of famously found out a few decades ago as to how far you can push against markets. They might not get to choose. What could go wrong at a fiscal and monetary level. And I guess, is that going to affect the underlying stocks that you invest in?

Jamie Halse

So if we step back and look at the high-level macro level, what we're seeing in Japan, we are seeing inflation pick up at the consumer price level. That's been driven by a decrease in the value of the Yen. As the US has raised interest rates, Japan has not. It's also been driven by increases in commodity costs, which have been slow to be passed through by Japanese companies because they it's typically quite reticent to raise price after decades of not raising prices and they're worried about consumer reactions, but we are seeing those prices start to come through now. We're also seeing some wage rises. Which is probably a positive thing for Japan and it does somewhat reinforce that inflationary impulse. The fear is that it could lead to pressure to raise rates. The most recent data we've seen though, is that imported prices into Japan, and it's mostly imports that drive inflation in Japan because they import energy and other commodities, the price of those imports now has turned down. So in April we saw that down 3% year on year,  which implies that we're going to see inflation peak and potentially, the pressure for consumer price inflation to subside over the next 12 to 18 months. So that relieves some of that pressure. For US, it doesn't continue to hike rights aggressively, we'll also see some of that pressure relieved.

If Japan does normalise its monetary policy, I think as a base case, you want to assume that monetary policy someone normalises over time. The areas where you might see pressure are with highly leveraged companies that have not reformed and not focused on profitability. Particularly domestic focused ones who don't benefit so much from a weak Yen. You might see pressure in some of the regional banks, where they haven't managed interest rate risk properly after such a low interest rate environment for such a long period. Very similar to what we saw in the US. With our portfolio where we are trying to mitigate some of these risks is really looking for companies with excess assets on their balance sheet, that may be returned to shareholders over time. Typically avoiding companies with high levels of leverage. And we also have a reasonably large weighting to companies that sell into global markets, so they are not specifically focused on the domestic market.

Jonathan Ramsay

So basically your best defence there is, what Ben Graham would have called a 'margin of safety'. That is, if it's already cheap, a lot of things can go wrong. And if the businesses are basically fundamentally healthy with strong assets, then you probably should be alright. That's the game plan. Don't worry too much about the macro because you've got asset backing.

Jamie Halse

That's exactly right. You got a lot of cases where Japanese companies have been hording capital, beyond what's needed. So there is significant real estate investments, cross shareholdings, excess cash. This is increasingly being returned to shareholders, but it definitely also provides protection on the downside. If something does go wrong in the macro economy.

Jonathan Ramsay

Do you want to just give us a couple of tangible examples, maybe in the first instance, something which is pretty obvious. It's got a decent yield that's growing and something not too controversial.

Jamie Halse

Sure. So it's a company you may not have heard of, MinebeaMitsumi. It's one of our larger holdings, both in the Japan Fund, but also in our International Fund. MinebeaMitsumi is a precision manufacturer, essentially, they make super small, super round balls for ball-bearings. It’s a very high tolerance, precision to ensure that the bearings work extremely effectively. And they also make electric motors and a number of other products, but in growing markets. They’ve been able to grow in the high single digits and have been able to redeploy the cash generated into other M&A and other niche areas. And they've been able to do that at very attractive multiples, which should provide very attractive returns through time. And you can buy the stock on about 12, 13 times earnings.

Jonathan Ramsay

Ok, not too controversial. I suppose we could do that ourselves, if we were that way inclined. But we also believe that it's a fertile environment for active management. Do you want to give us an example of something, which is perhaps not obvious. And one of the things we noticed just to give you a lead in, is, and it maybe relates to one of the points that you made before. Sometimes we see when we're looking at these companies from a high level, a lot of revenue growth, but not a lot of earnings growth. And at the end of the day, it's the earnings growth that's going to drive stock prices eventually. But if there hasn't been pressure to grow those earnings or to manage the balance sheets then they won't have done it. So it's the change. It's the stuff that when you look at the balance sheet, or you look at the recent earnings, it's not obvious. But if change is afoot, then that's probably where you make the even higher returns, rather than just investing in something just looks solid, continues to do what it's done. First of all, is that why we go for active management in Japan because this stuff probably won't be as well represented in the index. And secondly, do you have an example of something that you've got to think around a few corners?

Jamie Halse

Yeah, I think that's a really great point that you make there. And, we think that active management obviously is essential in Japan because it's one thing to look at a company trading on half book. But are you ever going to realise any uplift to that evaluation? And Japan has been notorious for these value traps that trade at half book forever. They never really rate upwards because management continually deploys capital to its unproductive assets, doesn't return cash to shareholders. So the key that we find with active management is to identify that change. Or sometimes you can be the impetus for that change by engaging with company management teams and helping them to understand the importance of capital allocation. And a great example of that, which is actually the largest position in our portfolio is that domestic packaging manufacturer Toyosaka. So they hold a leading share in making aluminium cans, they are big in plastic packaging, like shampoo bottles, or PET bottles and a number of other areas.  But this is a company that has historically, not earnt great returns on capital. They have built up significant cross shareholdings, real estate holdings, but haven't managed the working capital well. If you look at the excess working capital in the real estate and the cost shareholdings, the amounts are basically the market capitalisation of the company. Trades on half book. But we identified that there were some initial changes that have taken place management had actually increased the dividend payout and had committed to a level of share buybacks. So we identified that it was impetus inside the company looking for change. And we identified that the underlying businesses are actually quite solid (at least the good parts). So there are some parts of the business that they will look to restructure. This is the kind of thing that wouldn't necessarily show up on a screen and you need to do the work to find that out. Recently last week, in fact, they just announced that they're significantly increasing their buyback , again, increasing their dividends and committing to a large payout. So the company based on the price of the data was effectively committing to returning more than 50% of the company's market capitalisation to shareholders and cash returns over the next five years. As well as talking about selling down real estate, restructuring some of their businesses and releasing some of the capital from some of the weaker businesses. So we think that's pretty compelling and the stock has been a good performer for us.

Jonathan Ramsay

That sounds like a bizarre concept coming from the sort of highly sophisticated or competitive markets over here. When you’ve got that amount of lazy cash sitting around. And I suppose you have to value the company in a completely different way. Look, that's all really interesting. Thanks very much for that, Jamie. And I think having spoken to you, I've got two songs ringing through my ears. One, I think of the US, and it’s "party like it's 1999". And with Japan, "Things can only get better", investing change, something like that. Hopefully that's the case. And it sounds like it is a good time to be overweight Japan.

Jamie Halse

Yeah. I really think that we're seeing a tipping point now in Japan and with international investor interests coming in. Then probably the next stage of that is that they’ve made major reforms to their tax-free, individual investor savings accounts, to dramatically increase the impact to individual investors of signing up to those. And those will come in from the beginning of 2024. So maybe the next leg to the story is we see retail domestic money flowing into the market in a much greater way.

Jonathan Ramsay

Okay, look, that's great. You've given us some things to look out for and thanks for chatting again. Maybe we will hold you to account and see how this narrative unfolds over the next year or so, but thanks very much, Jamie.

Thank you.

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