Tap into Japan’s under-researched and under-appreciated market by investing into high quality companies driving sustainable growth outcomes. 

 

"In our experience, the culture and team of people is the most long-lasting competitive advantage of a company."

Sophia Li

Meet the manager

A short insight into how Sophia Li, Portfolio Manager, thinks about life and investing.

About the strategy

A behind-the-scenes look at the investment philosophy for the Japan investment strategy.

How we invest

 

Diversified and differentiated

The Japanese investment universe provides diversification, while bottom-up stock selection and high active share^ differentiates our portfolios from the benchmark index.

High conviction investments

A focused portfolio of 40 to 60 companies ensures that only the highest conviction investment ideas are included.

Integrated ESG analysis

ESG analysis, shareholder engagement and proxy voting is fully integrated into the investment process.

Investment themes

 

FSSA’s Japan equity portfolios are built company by company from the bottom up, with little regard for index positioning.  We are focused on growth in an absolute return* sense and construct portfolios of high quality companies with effective management teams, long-term, sustainable growth drivers and strong financials. Despite the perception that there is no growth in Japan, our core portfolio holdings have been able to adapt and grow despite economic headwinds, and have delivered sustainable earnings growth and attractive shareholder returns.

'Hidden gems' with growth potential

We aim to uncover high-quality, dominant franchises that can sustain strong and consistent earnings growth without relying on leverage or macro conditions. Often, these companies incorporate some combination of innovation, disruption or overseas expansion.

Niche industries with few competitors

In niche sectors with just one or two dominant companies, the leading franchises tend to maintain their market position as there are no significant rivals to compete with. This can lead to sustainably high returns for investors.

Growing trend of automation

As robots become smarter and less costly, manufacturers have started to automate to address labour shortages while improving efficiencies at the same time.

Dominant consumer franchises

Japanese consumer brands benefit from a strong following in the Asia Pacific region, with Chinese consumers in particular forming a large market for 'Made in Japan' products.

^ Active share is a measure of the percentage of stock holdings in a portfolio that differs from the benchmark
* Absolute return is the return that an asset achieves over a specified period

Case studies

 

Keyence is at the forefront of the automation industry with its sensors, laser markers and machine vision systems. The company has delivered excellent capital growth for investors. It has generated stable free cash flow and high returns on invested capital; and both sales and net profit per employee are among the highest in the industry.

We have been shareholders of Keyence since 2015 and believe the company is well positioned to reap the benefits of the growing automation trend.

There are a few key reasons for its superior profitability metrics and long-term steady returns. Keyence’s production is fabless (meaning it does not own factory plants) and its resources are concentrated in research and development (R&D), and sales and marketing. Due to its low fixed cost structure, Keyence generates high return on invested capital and earnings are typically resilient during a downturn. This also enhances its long-term competitiveness.

Keyence’s direct sales model (as opposed to a distributor sales model), enables the company to benefit from a virtuous feedback loop with its clients. Its extremely capable and technical sales consultants often design products to meet a client’s requirements before the client even knows what they need! This strong ability to innovate on product design translates into high (more than 80%) gross profit margins.

High employee productivity and competitive remuneration

Source: Company data, Bloomberg and Alliance Bernstein as at March 2020. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers' portfolios at a certain point in time, and the holdings may change over time.

M3 is a leader in online marketing for medical products. Over the years, M3 has built a huge following among doctors, with its platform dominating this niche market segment with more than 5m doctor subscribers globally.

More importantly, it has also monetised this relationship and as a result, generated high cash flow with a conversion ratio of 97% (net income/free cash flow).

Pharmaceutical companies have been taking note and are increasingly turning to more efficient marketing methods to preserve margins. By using ‘pay-for-performance’ services to promote their products directly to doctors on M3’s medical platform, the costs of hiring traditional medical representatives could be reduced significantly.

We first initiated a position in the company in 2017. M3 is a leader in a niche market with an economic moat and we believe their entrepreneurial culture and innovative mind-set should see continued growth as it invests into new business areas and overseas acquisitions. We believe M3 is on the right side of disruption and could become a much larger company in the next 5-10 years.

Physician subscribers topped 5m mark globally

Source: SMBC, company data, as at March 2019. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers' portfolios at a certain point in time, and the holdings may change over time.

With more offline retailers and consumer brand companies launching e-commerce portals, we believe GMO Payment is well positioned to capture the opportunity, due to its extensive experience and track record in the payments industry.

GMO Payment Gateway is an example of a 'hidden gem' with ability to grow despite Japan’s weak macro environment.

We have been shareholders of GMO Payment Gateway, the largest online payment processing company in Japan, since 2019. The e-commerce penetration rate in Japan is only 7% of retail sales.

The emergence of cashless payment transactions is a further potential growth driver for GMO Payment. Japan’s cashless payment penetration (18%) is still relatively low compared to countries such as South Korea (95%), the UK (67%) and the US (44%).

Recent policies, such as merchant subsidies and consumer rewards programs (which have been primary catalysts in other nations), are expected to accelerate the pace of transition. This could open doors to larger addressable markets, such as the offline cashless payment (JPY300 trillion) and the public tax/utilities market (JPY100 trillion).

Card usage rate to private final consumption expenditure

Source: GMO Payment Gateway, FSSA Investment Managers, as at May 2020. Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSSA Investment Managers' portfolios at a certain point in time, and the holdings may change over time.

Insights

 

Read the latest investment insights on our strategies and ESG related investment issues from our specialist teams.