the case for Japanese equities

David_Snowball

GMO released a research note today, arguing in favor of (a) Japan equities and (b) value investing therein. Here's their bottom line:

• Investors have been chronically underweight Japan for the past three decades, and rightly so given Japan’s weaker relative fundamentals and underwhelming commitment to corporate reform through much of the 1990s and 2000s.
• But conditions on the ground have changed meaningfully. Improving fundamentals and governance reforms are increasingly evident to investors speaking directly with companies and policymakers in Japan, as our Usonian Japan Equity team does. EPS growth has been relatively strong in Japan for years, distributions of excess capital have increased, and policymakers continue to push for more competitive and capital-efficient companies.
• Nonetheless, most international equity strategies remain materially underweight Japanese equities. Of 225 actively managed strategies in the eVestment database that list the MSCI EAFE index as their preferred benchmark, 84% are underweight Japan by an average of 7.5%. (GMO, "Japan Equities Are Compelling…" 10/4/2023)

GMO runs a couple Japan-value strategies.

Japan is rockin' this year. The New York Times agrees that changes in corporate governance are driving the strong returns ("

Investors Are Putting Big Money Into Japan Again. Here’s Why," 6/14/2023). The counterargument, at least according to my newsfeed, to GMO is that the gains are all driven by currency fluctuations. (Not my argument, and I haven't looked at the evidence behind it. I'm just reporting a headline I read yesterday). That said, the top three Japan-oriented funds over the past 10 are all ETFs, all hedged and all doing fine this year. Per MFO Premium:

1. WisdomTree Japan Hedged SmallCap: 14.4% APR for 10 years, 26% YTD, five star, Bronze analyst rating, highest Sharpe ratio, smallest drawdown,
2. WisdomTree Japan Hedged: 11.1% APR, 33% YTD, Great Owl, five star, Bronze analyst rating, tied for #2 in Sharpe
3. Xtrackers MSCI Japan Hedged Equity ETF: 10.3% APR, Great Owl, four star, Silver analyst rating, tied for #2 in Sharpe

Hennessy Japan Small Cap is the first actively managed fund on the 10-year list, at #4.

For what interest it holds, David

JD_co

Japanese equities are a tough sell. Japan keeps popping up each year as a contrarian play. There is a stigma there. Maybe they can shake it, but it would probably take continued progress.

David_Snowball

(nods) yep. They have been the source of more fake starts and broken hearts than my poor bedraggled Steelers.

BenWP

DIVI, VIGI, and CGXU, three international ETFs I track, all list Japan as the country with the highest percentage of their respective assets. FMIJX holds almost nothing in Japan, OTOH.

hank

If you play Japan be aware there’s a big difference between funds that hedge currency risk and those that are unhedged. Not that one is bad and the other good. Just that they can run in distinctly different directions at the same time. I’ve owned FLJP in the past. In the end came out OK. But this one is unhedged and actually lost ground last year while its sibling fund, FLJH, which is hedged, was shooting the lights out. Whichever way one goes (hedged or unhedged), it can be an exciting ride with unpredictable swings - as others I think have inferred. (Currently, I have only very minimal exposure to Japan indirectly through an asset allocation fund or two.)

Crash

0.06% of portfolio in Japan here. Fine with me. Feels like a money vaporizer to me. No, thanks.

chang

My impression has generally been that Japanese companies don't really care much about shareholder value.

See this recent article:

https://www.reuters.com/markets/asia/investors-seek-break-through-japan-incs-value-trap-2023-04-20/#:~:text=Japan's stock market has long,care little about shareholder returns.

Excerpt: "Japan's stock market has long been seen by investors as a 'value trap' where companies focus on market share, hoard cash and care little about shareholder returns."

WABAC

chang said:

My impression has generally been that Japanese companies don't really care much about shareholder value.

See this recent article:

https://www.reuters.com/markets/asia/investors-seek-break-through-japan-incs-value-trap-2023-04-20/#:~:text=Japan's stock market has long,care little about shareholder returns.

Excerpt: "Japan's stock market has long been seen by investors as a 'value trap' where companies focus on market share, hoard cash and care little about shareholder returns."

That has always been my impression too. Out of curiosity I checked in on my position in EYLD. Cambria's foreign shareholder-yield fund, is 21% Japan. That's its highest country concentration. OTOH, IHDG is only 7.96% Japan.

Shostakovich

Tweedy Browne and Oakmark, IIRC, have been making this case for some time.

Feels like value-trap-city.

AndyJ

Japan equity has been crushing it this year, especially currency hedged, up nearly 40% (DXJ). Question is more what happens now, after such a good run. There's been a small-ish selloff lately, and IMHO, it's not a buy-the-dip time, at least not yet.

P.S. The last year DXJ lost money was 2018.