As an investment destination, Japan has been on the outs for many investment managers. The country’s long list of woes includes two decades of economic stagnation, an ageing population, historically high unemployment, falling salaries and a colossal national debt of $7 trillion.
Adding insult to injury, long-time rival China recently leapfrogged Japan to become the world’s second-largest economy.
Still, it’s a bad idea to write off Japan, says Tim McElvaine, founder and president of Vancouver-based McElvaine Investment Management Ltd, and lead manager of Mackenzie Universal Canadian Value Fund and Mackenzie Universal Canadian Value Class. The third biggest economy, with a population more than three times larger than Canada’s, is nothing to sniff at.
McElvaine puts his money where his mouth is. “Our Japanese content is well over 20% now, from 0% a year ago. Our U.S. content has probably gone from over 30% a year and a half ago, to may be 4% or 5% today.” The reason for his shift from the U.S. to Japan is simple: that’s where the bargains are.
“To get the best bargain, you have to buy what other people are selling,” he says. It’s a philosophy that resonates with the value investor in him.
Japan is quite cheap when investors consider what they are getting for their money, he says. “Over the last five years the Nikkei has been as high as 18,500 and today it’s somewhat over 9,000,” he says. “But when we started buying in Japan, it was in the range of 8,000.”
McElvaine’s selection of Japanese companies is tilted toward the export-focused sectors. He’s been buying Yamaha, Makita, Kikkoman and other companies that have strong presence in Europe, North America and China and are not entirely dependent on domestic consumption. “We’re buying branded multi-national companies with very strong balance sheets.”
And yet he’s buying them for below asset value, thereby paying nothing for the businesses, the brand name or the cash flow generation.
Japanese trade is well-diversified and has increasingly been giving a wide berth to economies that are performing poorly. Over 50% of trade remains within the region. For instance, Japan is one of the largest providers of the high-tech parts used in products made in China and Southeast Asia. Its supply chain spans across Asia and it has easy access to the rapidly expanding markets of China and India.
“Until recently we’d been quite focused on exporters and branded food, but more recently we got a bit more involved in the financial sector in Japan,” McElvaine says. “I like to stick to my knitting and that’s finding margin of safety. That’s what leads me to Japan.”
(10/20/10)