Hiroshi Tateda is confident reforms in Japan will eventually trickle through into the banking industry under the new governmentSmall caps respond to Japanese reform
The Merrill Lynch MST Japan Opportunities fund, managed by Hiroshi Tateda, invests primarily in small-cap stocks that show the transparency, good corporate governance and commitment to shareholder value Tateda expects to see in the Japanese 'new economy'.
'Our style is bottom-up stock selecting with a thematic overlay,' says Tateda. 'What happened in the US and the UK will happen in Japan in the next 10 years.'
Tateda runs a bottom-up fund. It is described as a theme fund but those themes are, in fact, a function of the stock picks and the themes are used as a risk overlay rather than a stockpicking tool.
He looks for the ability of companies to assert pricing power. However, in a deflationary environment this is very difficult and requires consistent innovation. Even being able to sustain prices is an impressive feat in an environment where many companies are lowering theirs. Increasing consumer sophistication also means that there is less room for wasteful mistakes.
'In the old economy, companies would push out products, now they have to follow consumer needs,' says Tateda.
The fund tries to find new possibilities in a period of turmoil. For example, Tateda claims the healthcare system is essentially bankrupt. Deregulation of the healthcare system over the next three to five years should provide plenty of opportunity to develop and pursue new investment ideas.
The unpopularity of the asset class in which the fund invests means that there are only a small handful of analysts that cover it, so, he has to send his team in for intensive company visits.
He invests mostly in stocks with a market cap of $300m- $3bn, with a 30% pa turnover. He is concerned about stock liquidity, which is generally poor, but does not want to take more than two weeks to establish or sell a position. The maximum position in any one holding is 5%. He expects to have 50-80 holdings and currently has 64.
A large part of the fund's three-year track record came in the last part of 1999, where Tateda took a strong tech position during the boom, and then took off his position at the end of the year. Although he has a great deal of investment freedom, Tateda claims that this kind of single-mindedness is a rarity. Under normal conditions the fund will be diversified throughout many sectors.
The near-term future for Japan is ugly, with increasingly bad economic prospects for several years as reform trickles down into corporate governance and the banking industry. Companies that have always been modern ' keen to show transparency and add shareholder value and so on ' are going to show strong growth and provide good investment opportunities.
'In new Japan, the balance sheet is very clean ' there is no debt,' says Tateda.
These companies are more eager to go to the market to raise capital. Tateda looks for companies that appeal to domestic-orientated demand. 'Because they will lead the Japanese economy for the next 10 years,' he explains.
Economists have been expecting fundamental reforms in corporate Japan for more than 10 years now, and have always been disappointed. However, Tateda points out that changes have been happening, but to a far larger extent in manoeuvrable small-cap stocks than the lumbering large-cap market.
Tateda thinks that even during the long-term bear market and despite talk of reforms many companies were still protected from the long-term effects of inefficiency through owning valuable assets, such as land and property. Managers could reassure themselves that their company was large enough to survive the bear market and wait for new growth to rescue them from bankruptcy. He thinks that this changed in 1999 when dropping land prices combined with the falling equity markets put significant pressure to reform on managers. This has also precipitated a crisis for individuals as companies started firing people in quantity.
Of particular note are the reforms promised by the new prime minister, and these form the basis for much of Tateda's future confidence.
Although details are sketchy, it is likely that there will be a shift of resources from the public to private spheres, including a move from an indirect financing system to a direct financing system (for example, from banks to capital markets).
Another reason for hope is that government reform is expected to become more transparent. Previously, decisions were always decided behind closed doors by the members of the LDP. This will hopefully be reduced and the fiscal policy and advisory committee (which reports directly to the prime minister) will be given real power. While the prime minister's approval rating remains good, Tateda remains confident that reforms will be pushed through.
About the manager
Tateda joined the team in 1997 as a fund manager. He has been in the investment industry since 1988, his prior experience being with Meiji Life Insurance from 1988 through 1997, where he was a Japanese fixed income, US fixed income and US equity portfolio manager. Mr Tateda received his Law degree from Keio University. He is a chartered Member of the Analyst Association in Japan.
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