Abenomics is neither dead nor sick — Japan fund manager
NEW YORK–To paraphrase Mark Twain, the reports of Abenomics’ death have been greatly exaggerated, at least according to Masakazu Takeda, the portfolio manager for the Hennessy Japan Fund (HJPNX).
He said Japanese companies are healthy and comfortably profitable. He should know he’s been running the Japan Fund for 10 years. Over that period he’s beaten both of his benchmarks, the Tokyo Price Index, or Topix, and the Russell/Nomura Total Market Index for the 1-year, 3-year, 5-year and 10-year periods on an annualized basis through the first quarter of 2016.
Since its 2003 inception, the fund has an annualized return of 8.12% through March 31, more than double the two benchmarks. In 2015, it returned 12.95%.
Last week, Richard Koo from Nomura told London’s Daily Telegraph Abenomics was effectively “dead in the water” after the Bank of Japan was forced to retreat from further emergency stimulus after a blizzard of criticism at home and abroad.
Ever since the BOJ pushed its benchmark interest rate into negative territory, the plan has backfired. Instead of weakening as expected, the Japanese currency has surged more than 10%. On Tuesday, the currency hit an 19-month high of 105.5 yen to the US dollar. The Telegraph said the rising yen is undercutting the whole purpose of “Abenomics” and reigniting a deflationary spiral. Late Wednesday in New York, the yen traded at 107 to the dollar.
“Abenomics is neither dead nor sick. It’s making progress steadily, but slowly,” said Takeda in an interview with the Asia Times in New York.
“Abenomics is not just one or two measures to turn around the economy, but dozens of policy measures and tax reforms, such as personal income tax reform, corporate governance reforms, labor market reforms, and creating and growing new industries, like renewable energy.”
Takeda said structural reforms make up a large part of the Abenomics strategy, but many are still a work in progress. One of the major successes has been cutting the corporate income tax rate from 38% in 2013 to less than 30% now.
“It was a massive reduction in tax rates in just three years,” said the fund manager.
New stewardship code
There have also been big strides in corporate governance, said Takeda. In February 2014, the government’s Financial Service Agency issued a stewardship code and Principles for Responsible Institutional Investors. The stewardship code is guideline, or code of ethics, for listed companies, based on the US corporate governance code.
Takeda said this stewardship code allows for constructive dialogue between investors and listed companies, on how to improve return on capital and maximize shareholder value.
“We didn’t have anything like this before,” said Takeda. “Japan has been known for its socialist-capitalism. Corporate management didn’t care about return on capital. There was a lack of perception that companies are owned by shareholders. So, this is a big change. More and more companies are increasingly focused on return on capital or returns on equity.”
From his viewpoint as a fund manager, Takeda feels the Japanese economy is moving forward steadily, but external factors are crippling the momentum. Still that doesn’t mean the momentum is dead.
As for the negative interest rates the BOJ instituted in January, he said the jury is still out.
“We don’t know yet if it will save the economy from deflationary pressure,” said Takeda. “I think the BOJ did the right thing in the wake of a slowing China and falling oil prices. Against that backdrop, the BOJ did the right thing. If they hadn’t done it, the market would have interpreted it as the BOJ had run out of policy options. If they hadn’t done anything if would have sent a bad message to the market. I don’t know if the decision will work, but I don’t blame the BOJ for doing this.
Takeda said the original stimulus, the reflationary measures, and the monetary policy only helps solve the inflationary situation of Japan, but it doesn’t do anything in terms of the economy’s growth rate. That comes down to the structural reforms.
“The BOJ has done its part, but going forward structure reforms should take that lead. But for that to happen you have to be patient,” he said.
Takeda said he isn’t worried about the rising yen. Even though the currency has strengthened since the beginning of the year, Japanese companies have been through much worse. In 2008, the yen was as high as 75 to the dollar. At the time, Japanese companies had to work extremely hard to streamline their cost structures in order to survive and remain profitable.
At the current level, these companies are still generating high levels of cash flow, said Takeda, which they are reinvesting into their core business activities, such as domestic production facilities and factories, and research and development.
“All this bodes well for the future growth of these companies,” said Takeda.
Kumamoto quake impact
As for the Kumamoto earthquake that hit Japan last month, he said he didn’t think it would have a huge impact on gross domestic product. While the earthquake disrupted industry supply chains, especially in the car industry, in terms of scale, it was much smaller than the 2011 earthquake.
Takeda doesn’t make market prediction. He said he’s agnostic on the macro economy. As a bottom-up stock picker, he invests in great businesses with exceptional management at an attractive price. He likes companies with a high return on equity, sustainable and predictable earnings growth, and strong cash flow. He looks for companies with significant international growth exposure and a proven long-term track record.
Since these companies are pretty rare to find, the fund has a very concentrated portfolio of just 21 stocks. But once he finds something he likes, he holds on. The fund’s turnover ratio is just 21%.
His top five holdings are Terumo, Keyence, Shimano, Ryohim Keikaku and Unicharm.
He said Unicharm, which is Asia’s largest maker of personal-care goods, has a long runway for growth in China and Indonesia. It specializes in diaper products and sanitary napkins and currently controls 30% of the Indian market.
Lawrence Carrel is an award-winning journalist and author of ETFs for the Long Run: What They Are, How They Work and Simple Strategies for Successful Long-Term Investing and Dividend Stocks for Dummies. His work has appeared in The Wall Street Journal, SmartMoney, TheStreet.com, Kiplinger’s Personal Finance Magazine, Reuters, The Associated Press, Investor’s Business Daily, Business WithoutBorders.com, The Economist Intelligence Unit, Financial Planning, Barron’s Online and others.