Transcript

- So why Japan? Japan equities, it has a potential to offer good total returns through earnings, dividends and buybacks over the course of mid to long term. Over the past 15 years, Japan equities as an asset class has already provided double digit annual returns, which is one of the best non-US asset classes. We believe there is a meaningful perception gap amongst global investors because Japan is a country with this anemic GDP growth. And that perception gap is leading to a lot of global investors still sticking to a massive underweight versus the benchmark index, and this is another thing that we believe and we're constructive on the asset class itself. For total return opportunities for Japanese equities come from, one, net profits, which basically comes from global growth and also in the need of domestic labor productivity enhancement. And on top of that, especially over the past few years, and most likely going forward, a increase in total return potential through dividends and buybacks will be an additional growth opportunity. And also a idiosyncratic, very unique one to that of Japan as many of the Japanese corporates balance sheet are, I would say, having too much cash and has a lot of opportunities and potential for improving its capital allocation policies. - We highlight three reasons to go active in Japan. First and foremost, Japan is under-researched market. If you look at index like TOPIX, which consists 2000 companies, half the companies are actually not covered by analysts. 20% of it is only covered by one or two analysts. This creates significant opportunity for bottoms up research and it benefits long-term capital providers like Matthews Japan. Second of all, Japan's index is diversified. Japan's index, if you look at top five concentration of our market-cap companies, it's only 15%. This is lowest among Asian-pure indexes. It's actually lower then global indexes. Let's take example of US. If you look at Magnificent 7, it's actually 50% plus of NASDAQ and more than 1/3 of S&P. Diversified is not necessarily bad, but it starts to mirror macro factors, not the idiosyncratic factors that Japanese companies are experiencing. We think concentrated active approach is the best way to take a long-term alpha generation in Japan. Lastly, volatility. Japan's is underweight by many of the international investors and sometimes it creates significant volatility induced by foreign currency movements and also internal value to growth rotations. However, we think this is blessing in disguise. We take advantage of that downside because some of the quality franchise value could go down more than average companies. We think these are the best time to scoop up best companies at a lower value. - Our investment philosophy is to provide core growth, all-sector, all-cap solutions to our clients, not relying on certain styles or momentum factors. In order to achieve this, doing on-the-ground research and making our investment based on firsthand information is essential to our process. What makes us unique, in our view, are three things. First, we do on-the-ground research in Japan, and we are research analysts sometimes before even portfolio managers. Every single investment that we do in our portfolio, either one of us is responsible for meeting the company on a quarterly basis and constantly update what's happening in the storefront. Secondly, our on-the-ground research does not end in doing research in Japan. Half of the corporate earnings come from overseas, meaning outside of Japan. So even year-to-date, we have been doing research for Japanese corporates, visiting them in their US headquarters in Texas and Louisiana. We also work very closely with our colleagues that manage the country funds like the China funds, the India funds and Korea funds and the Asia and regional funds, and to do and gain insights and cowork in terms of our investment decisions in the Japanese equity side. Thirdly, we do believe that we have a unique access to the top management of Japanese corporates. Most if not all of the top 50 C-level management in Japan actually come to the United States once a year and spend a day in San Francisco. We are fortunate enough to actually have a face-to-face one-on-one meeting in San Francisco, and oftentimes, this is a unique opportunity that we do not get in Tokyo. So actually being based here in San Francisco, these things that we believe are unique to our investment process.