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Hedge fund picker banks on activists in bet that Japan Inc will change its ways
ED ROGERS, who runs a fund of hedge funds in Tokyo, is adding another activist to his line-up, betting the strategy will pay off as Japanese firms become more open to overhauling their businesses.
Mr Rogers' Wolver Hill group, which already allocates about 5 per cent of assets to an activist manager, plans to put money in a second such fund in the first half of 2018, increasing the total to about 10 per cent, he said. He declined to identify the funds. Mr Rogers expects more Japanese firms to reorganise their operations in the country's drive to improve corporate governance, with his hedge fund picks profiting from the changes.
Beyond the stream of scandals at iconic names from Toshiba Cor. to Kobe Steel Ltd, Japan has been reshaping its rules for how firms operate since Prime Minister Shinzo Abe returned to power at the end of 2012. Return on equity for stocks in the benchmark Topix index has doubled, dividends and share buybacks have surged, and investors such as Oasis Management Co have had some success in bringing change at companies.
"Corporate governance has taken root in Japan," said Mr Rogers, who's chief executive officer of Rogers Investment Advisors. "From an alpha point of view, we think there's a tremendous amount of restructuring going on." The country introduced a stewardship code in 2014 and a complementary set of voluntary rules for listed firms the following year, aimed at increasing discussions between executives and investors and ultimately improving corporate profits. While many commentators have heralded the changes, others point out that some companies are just going through the motions, and that there is much more to be done.
"It was just clear that Japan had to start addressing its problems, and restructuring in a significant way was going to be part of the solution," Mr Rogers said, pointing to the country's declining population coupled with a low level of immigration. "Just for survival alone, they're going to have to start to change, and more likely than not, they're going to restructure an existing business, meaning an activist opportunity."
Work on the overhaul has continued. Last month, a state-appointed panel proposed revisions to the corporate governance code, designed to:
- Increase use of independent advisory committees for nominating executives and deciding pay;
- Promote further unwinding of so-called cross-shareholdings, stock that companies and institutions hold in listed peers to cement relationships;
- Encourage corporate pension funds to provide more guidance to companies they invest in (such funds have been reluctant to sign the stewardship code).
Some of the world's biggest investors share Mr Rogers's assessment. "The ship has basically sailed," said Nicholas Weindling, a fund manager in Japan at JPMorgan Asset Management Ltd, which oversaw about US$1.6 trillion globally as of September. "It has started sailing and it's going to keep moving forwards."
The Topix has more than doubled since Mr Abe returned to power in December 2012. It added to those gains on Tuesday, rising 0.4 per cent.
Hugh Young, head of Asia for Standard Life Aberdeen Plc, which has US$924 billion in assets under management and administration, said he's excited about Japan because of the governance changes. But he added some caveats. Companies still unnecessarily issue convertible bonds, which can later dilute existing shareholders, he said. And Japan could use more women on boards, added.
"Governance is improving, but it's still a battle," Mr Young said. For sure, Japan still lags behind the US by several measures. For example, women on average make up less than 4 percent of boards at Topix companies, compared with more than 21 per cent for firms in the S&P 500 Index. And while almost all S&P 500 companies have a majority of independent directors, fewer than 3 per cent of Topix stocks do, according to the latest full-year data compiled by Bloomberg.
And while the Nikkei newspaper had previously said that the code would include a recommendation that at least a third of board members should be independent, that didn't make it to the final version of the revisions, as Goldman Sachs Group Inc pointed out in a report last month.
But Mr Rogers remains positive. His new activist will become the 11th hedge fund in his line-up. "It's a long-term process, but yes, the Japanese are absolutely paying more attention to corporate governance," he said. BLOOMBERG