Max Godwin is the Portfolio Manager of the Eastspring Investments Japan Equity team and is responsible for “Smaller Companies” strategies.
Max has been with Eastspring for over 10 years. He has more than 25 years of financial industry experience in which 20 years has been investing into Japanese Equities.
Max is part of Eastspring’s Japan equity team that manages over USD 13 billion* across four strategies. The team are contrarian investors exploiting behavioral episodes and have received numerous industry awards and accolades in recognition of one of the strongest track record in managing Japanese Equity portfolios.
*As at 31 July 2017.
HOW DOES EASTSPRING IDENTIFY OPPORTUNITIES IN THE TYPICALLY UNDER-COVERED SMALLER COMPANIES SEGMENT?
Exuberance for popular market themes can drive unrealistic return expectations and a total disregard of the starting price of an investment. In this environment, investors often overpay for perceived comfort, but overlook more attractively valued opportunities. We are not concerned with the “popular market narrative” that other investors use to justify their holdings. Our priority is to understand what information is in the price we pay, and in doing so, this process leads us to opportunities that are often ignored by the market.
“What sets Eastspring Investments apart is that we hunt for opportunities where there is a large difference between the price of the stock and the value of the company, which is determined by the returns the company can generate on a sustainable long-term basis”
This dislocation in relative value can occur in any sector. We do not pick sectors or themes but instead respond to bottom-up valuation signals. As our approach is purely bottom-up we think of investment opportunities on a stock by stock basis.
WHERE ARE YOU FINDING OPPORTUNITIES IN JAPAN AND IN PARTICULAR THE JAPAN SMALLER COMPANIES SEGMENT?
We do not allocate on a sector basis. We have found, on a stock by stock basis, high conviction names with strong valuation signals across much of the market. Included are investment opportunities in retail and property-related names; regional banks as well as non-bank financials; electronic and auto component manufacturers; specialist materials and industrials names. These names represent a wide range of industries, from more domestically focused to export related.
HOW DO YOU MAKE THE DECISION TO PICK A PARTICULAR STOCK FOR YOUR PORTFOLIO?
The one thing in common across all our holdings is that the starting share price is very cheap relative to the level of sustainable earnings each company can generate over the longer term.
“By identifying the most mispriced assets, we are looking to be more than compensated for the risks associated with a company’s ability to generate longer term sustainable trend earnings.”
For example, we test a company’s ability to fund its longer term operations; any changes in its level of capital efficiency; its ability to focus on parts of the business that are core to the future drivers of profitability; and the ability and willingness of management to respond in a competitive market environment. These are examples of how we test the sustainability of earnings.
We build our conservative assumptions around a company’s ability to generate earnings through a time frame typical of a business cycle. We are not focused on short term news flow. Importantly, our approach is to build high conviction.
CAN YOU SHARE WITH US SOME OF THE UNLOVED OR CONTRARIAN OPPORTUNITIES YOU HAVE INVESTED IN?
We had identified Mitsui OSK Lines (MOL) as an investment candidate after it had de-rated along with the shipping industry in a weak global cyclical environment. Additionally, there was a significant over supply in the shipping fleet, where shipping rates and profitability was falling sharply. However, our due diligence suggests that thematic preferences are dominating the market’s behavior with an aggressive extrapolation of the current environment taking place. MOL has demonstrated an ability to restructure its core bulk business by reducing costs, reducing spot market exposure and reinforce stable earnings from a contract based business. There remains a near term imperative for MOL to stem losses in its container business which it is addressing by merging this business with two major competitors.
We observe that consolidation in the industry is taking place with excess supply falling and capital beginning to exit amid moderating cyclical pressure. There are strong valuation signals based on our conservative assumptions and this compensates for the observed cyclical risks.
Tokyo TY Financial Group, a regional bank, have been operating amid a tough low interest rate environment for a long time. However shares for Tokyo TY Financial Group are attractively valued compared to the likely level of sustainable earnings it can generate. Its loan book is well diversified by industry and maintains a relatively high exposure
in higher margin loans to the small to medium enterprise market segment. The bank is also located in the growing Tokyo area and has been a consolidator of other banks, which is expected to deliver significant mid-term cost savings. Our analysis suggests that the market’s pessimistic expectations, amid a negative interest rate environment, have already more than priced in a significant contraction in domestic net interest margin.
“By applying conservative trend assumptions we find significant valuation upside which more than compensates us for the apparent risks.”
Credit Saison has underperformed the market over the past three years and as result is now attractively valued. Additionally, the issues facing Credit Saison and the consumer finance industry in general, are well known to the market and are more than priced in with significant valuation support. Our conservative trend assumptions have taken into consideration amongst other things, the likelihood of rising costs associated with IT infrastructure spending; the potential for rising trend credit costs from historic low NPL levels; ongoing liabilities stemming from legacy claims on the consumer finance industry; and the potential impact from a change in significant shareholders. The trend shift in its business mix away from an interest rate sensitive consumer finance business to a fee-generating transaction processing business appears to have been overlooked by the market. However, this is supportive for our high conviction for the likely level of sustainable trend earnings that could be generated.
For more information please visit eastspring.com/jsc
Disclaimer
This material is produced for professional clients and information purposes only, it does not constitute an offer to buy or any investment advice, nor shall it be relied upon as including sufficient information to support an investment decision.
This material is issued and has been prepared by Eastspring Investments (Luxembourg) S.A., authorised and supervised by the Commission de Surveillance du Secteur Financier (the “CSSF”), acting through its UK branch, 125 Old Broad Street, EC2N 1AR, London, in relation with the management of Eastspring Investments – Japan Smaller Companies Fund, a sub-fund of Eastspring Investments, a Luxembourg based umbrella Société d’Investissement à Capital Variable (the “SICAV”) regulated by CSSF and qualifying as UCITS. The SICAV sub-funds may only be offered in a limited number of jurisdictions where the sub-funds have been locally registered, please refer to www.eastspring.lu for the full list of SICAV sub-funds and relevant share classes available in your country. The value of an investment is subject to investment risks, including the possible loss of the principal amount invested. The value of shares in any sub-fund of the SICAV and the income accruing to the shares, if any, may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the SICAV. Eastspring Investments (Luxembourg) S.A., including its UK branch, is an ultimately wholly-owned subsidiary of UK based Prudential plc, whereas such entities are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America
