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Business Trends

Foreign investors see value in Japan Inc's good governance

Changing business environment attracts activist funds and value investors

Japan Inc. is increasingly feeling the influence of overseas investment funds as corporate governance improves.   © AP

TOKYO -- As Japanese companies work to improve corporate governance, they are attracting more foreign investors looking to cash in on the changed business climate.

Statistics released by the Tokyo Stock Exchange and other Japanese bourses show that the ratio of foreign ownership in the country's stocks remained almost unchanged in the fiscal year through March 2018 from a year earlier at 30.2%. Despite this, Japan Inc. is increasingly feeling the influence of overseas investment funds.

This was seen in the recently announced merger of Idemitsu Kosan and Showa Shell Sekiyu, planned for spring 2019. The contentious deal may not have happened without a push from activist fund Oasis Management.

Phillip Meyer, chief operating officer of the Hong Kong-based fund, said that corporate governance in Japan is improving, and that his company is very positive about future growth in the country.

According to QUICK-FactSet, Advanced Micro Devices, a rival of Nvidia, comprises over 30% of Oasis' portfolio. Most of the rest, however, is invested in Japanese companies, including Toshiba and GMO Internet. Oasis thinks the two can improve their operations and capital deployment, and has been steadily increasing its stake in them since the fund launched in 2002.

Oasis’ influence was also felt at a general shareholders meeting of Alpine Electronics, during which the fund’s call for increased dividends and appointment of two outside directors of its own choice garnered support from more than 25% of the shareholders.

Foreign funds that specialize in value investments are also on the prowl for undervalued or underperforming stocks.

One of these is Asset Value Investors, a UK activist fund. During the general shareholders meeting of Tokyo Broadcasting System Holdings on June 28, AVI demanded that TBS distribute part of its shareholdings in Tokyo Electron as dividends in kind. The demand was rejected.

Many of AVI's shareholdings are in companies with large latent gains on assets. In addition to its stake in TBS, AVI has shares in Digital Garage, an internet company which owns 20.8% of price-comparison site operator Kakaku.com, and Toyota Industries, whose holdings in Toyota Motor total 7%.

CEO Joe Bauernfreund said many Japanese companies hold disproportionately large cash reserves and have inadequate capital structure. He wants these companies to make better use of their cash and assets.

Bauernfreund first came to Japan in 2004 as an analyst. Since then, he visits once or twice a year to check the business landscape. He notes that Japanese companies are taking longer than their Western counterparts to reform, but sees clear changes. AVI’s holdings in Japanese stocks now comprise 20% of its portfolio, up from about 6% over the past two or three years, he said.

Indus Capital Partners, a U.S. investment fund, also sees latent value in Japanese companies and has added more of them to its portfolio, especially companies with unique technologies and services, such as chemical company Showa Denko.

Ethan Devine, manager of Indus’ Japanese equity portfolio, wants companies to use their cash holdings to increase income, such as investing in capital spending and mergers and acquisitions.

Singapore's Effissimo Capital Management owns large stakes in Japanese companies, including Toshiba, Dai-ichi Life Holdings and Ricoh. On June 27, the investment fund announced it raised its stake in Ricoh to 14.11%.

Some Japanese companies attract more than one foreign fund. Oasis and AVI both have a stake in Toshiba Plant Systems & Services, seeing growth potential thanks to the company's large cash holdings.

The sizes of these foreign funds are small compared to Japan’s largest investment managers. For example, Icahn Associates, a U.S. hedge fund sponsor, has assets under management totaling $26 billion, compared to the over $500 billion held by Japan’s Asset Management One.

But as Japanese companies forge ahead with reforms -- releasing cross-held shares and loosening ties with each other -- foreign investors are making their presence known and continue to increase their influence.

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