Q: Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
A: The Polar Capital Japan Value Fund aims to generate long-term capital growth by investing in companies trading at a significant discount to what the investment team perceives to be their intrinsic value. They do this by investing in companies across the market-cap scale listed on the Tokyo or regional Japanese exchanges.
Fund managers Gerard Cawley and Chris Smith are long-term, bottom-up stock-pickers, focusing primarily on value characteristics. They believe the investment opportunities presented by Japan are unique in a global context, with extreme divergence between intrinsic and market values caused by a combination of behavioural, capital and informational inefficiencies. These include language barriers and the poor capital allocation policies traditionally associated with corporate Japan. The team look to exploit these unique inefficiencies to generate consistently strong risk-adjusted returns.
They typically focus on company fundamentals combined with their knowledge of off-balance sheet assets derived from their experience of the Japanese equity market. Team research then focuses on securities where the market value is significantly below the estimated intrinsic value when compared to the market in general, historical levels and peer groups.
The investment team is Gerard Cawley, Lead Fund Manager, and Chris Smith, Co-Fund Manager. Gerard joined Polar Capital in 2005 from Schroder Investment Management and has been manager of the Fund since its launch in 2012. Chris joined the firm in 2012 as a Japanese equity analyst, prior to which he worked in accountancy.
Q: How are you positioning your portfolio?
A: There are several opportunities present in the Japanese market that are unique. Gerard and Chris have positioned the portfolio to capture the alpha opportunity presented by these opportunities.
The largest opportunity in Japanese equities remains the unlocking of value, an effort which started with the late Shinzo Abe as Prime Minister in 2012, through improvements in corporate governance. These efforts have continuously been evolving since that time and once again accelerated in 2023, with the Tokyo Stock Exchange (TSE) increasing disclosure requirements for the worst offenders.
The primary aim of Japan’s fight to improve capital efficiency is to attract long-term capital to Japanese equities and the Fund is positioned to take advantage of the anticipated multi-year rerating and improved company valuations.
The portfolio is positioned to capture the opportunities generated via the enhancements in corporate governance. The Fund is overweight companies that are, operationally speaking, high quality but have inefficiencies driven by mismanagement on a capital allocation perspective. These investments offer investors a unique risk/reward profile, with highly tangible net assets providing strong downside support with upside potential being driven by the increasing pressure to reform capital policies. The Fund is heavily overweight smaller companies, an area of the market that is most exposed to the ongoing reform efforts.
The primary aim of Japan’s fight to improve capital efficiency is to attract long-term capital to Japanese equities and the Fund is positioned to take advantage of the anticipated multi-year rerating and improved company valuations.
Q: Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
A: The portfolio is currently exposed to the following thematic opportunities:
TSE capital allocation: Our primary focus is on identifying companies with substantial capital reserves and high quality operations. We anticipate that current external pressures will force these companies to optimise their capital management strategies. This shift towards efficient capital allocation is expected to result in increased shareholder returns and bolstered investment in growth opportunities.
Listed subsidiaries: Ongoing corporate governance reforms have introduced challenges in maintaining listed subsidiary relationships. We believe this structure may not be sustainable in the future. As a result, listed subsidiaries may need to be either fully acquired or spun off to adapt to the evolving regulatory landscape.
Activist engagement: The Japanese market has witnessed a notable rise in activist investors. The reduction of cross-shareholdings and increased engagement from institutional investors have left management more susceptible to activist pressures. Our portfolio includes investments in several companies where activist investors are engaging with management to unlock untapped potential.
