\n Nicholas Ng, Head of Asia Pacific (APAC) ex Japan Wealth Business at Daiwa Asset Management, took to the stage during the “In the Hubbis Hot Seat” session at the Hubbis Investment Forum in Hong Kong. In the session, fund managers and product providers were each given five minutes to present their investment ideas to an audience of wealth management professionals. Based in Singapore, Ng used his time to explain why, in his view, a Japan engagement strategy, a form of activism that is not hostile, has been attracting interest from investors.\n <\/p>\n
A Large Pool of Corporate Cash<\/p>\n
Ng opened with a figure that he suggested private wealth investors in Asia should be aware of: USD1 trillion. This, he said, is at least the amount of cash currently sitting on the balance sheets of publicly listed companies in Japan.<\/p>\n
He attributed this to Japan’s economic history. According to Ng, the country experienced deflation for close to three decades, and the economy was essentially a low growth environment until relatively recently.<\/p>\n
In his view, this led many corporate management teams to become risk averse. He said they tended to hold cash on their balance sheets, which suppressed valuations, and in some cases ran their companies in ways that did not always serve the interests of other shareholders.<\/p>\n
Ng described the potential unlocking of this cash as one of the most important equity catalysts in Asia.<\/p>\n
Governance Reforms as a Catalyst<\/p>\n
Turning to what has changed, Ng pointed to Japan\u2019s corporate-governance reforms and efforts by the Tokyo Stock Exchange to encourage listed companies to focus more closely on capital efficiency, stock prices and corporate value.<\/p>\n
According to Ng, companies that do not respond may potentially face removal from a stock market index, or even delisting from the exchange.<\/p>\n
As a result, he said, many companies in Japan have been working to return capital to shareholders. He cited dividend increases, share buybacks, the sale of assets outside their core business, and reinvestment into business growth as examples.<\/p>\n
The Limits of the Hostile Approach<\/p>\n
Ng noted that the large cash pile has attracted the attention of global hostile activist investors. In his view, however, their approach has not always proved effective in Japan.<\/p>\n
He described what he called the typical hostile activist playbook: taking a stake in a company, publicly announcing plans to replace the management team, strip out assets and take on debt, with the goal of increasing the company’s valuation.<\/p>\n
According to Ng, this approach may not always succeed in Japan because corporate Japan remains very much relationship driven. When a management team feels threatened, or there is friction with other shareholders, he said, companies may turn to defence mechanisms, such as their existing cross shareholdings or the legal system.<\/p>\n
Engagement Behind Closed Doors<\/p>\n
Given these factors, Ng suggested that an engagement strategy may offer a more effective alternative.<\/p>\n
He explained that in an engagement strategy, the fund manager also takes a stake in a company, but then works with that company to unlock value. “The difference is, a hostile approach is done in public and is trying to force immediate change, whereas an engagement approach is usually done behind closed doors,” Ng said.<\/p>\n
Under this approach, he explained, the manager works with the management team to build trust and proposes a number of solutions to unlock value over the medium to longer term.<\/p>\n
Three Features of the Strategy<\/p>\n
Ng said he believes a Japan engagement strategy is fairly distinctive and can offer an asymmetric risk and reward profile. He outlined three reasons.<\/p>\n
The first, he said, is that investors can take an approach similar to private equity while retaining the liquidity of public markets.<\/p>\n
The second is that performance and returns are idiosyncratic. In his view, they are driven by internal corporate restructuring rather than global market momentum.<\/p>\n
The third is what he described as a margin of safety. According to Ng, typical engagement candidates trade at low valuations and hold high levels of cash and low levels of debt.<\/p>\n
Closing Remarks<\/p>\n
Ng concluded by suggesting that change in corporate Japan is under way. “Japan’s corporate revolution is happening right now,” he said.<\/p>\n
He invited members of the audience who wished to learn more about Daiwa Asset Management’s approach to engagement investing to get in touch.<\/p>\n
His pitch reflected wider interest among investors in Asia in how governance reforms in Japan may affect listed companies. For Ng, engagement is one approach through which investors may seek to participate in that process.<\/p>\n
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