The three key questions for all investors: Why this strategy? Why now? Why pick it over its peers?
“Japan is buying Japan.” That is how Comgest portfolio manager Richard Kaye encapsulates the first of three compelling reasons why an allocation to Japan equities “has to be considered – and even augmented” – by investors.
“There are three major inflection points occurring right now,” he says in the above WealthWhys video. “One is that the Japanese market’s local investor base – from ‘Mr and Mrs Watanabe’, as they are sometimes called, to the behemoth institutional investors of Japan, which includes some of the biggest investors on the planet, such as Japan Post Bank – are increasing their allocation to Japan equity, from a very low base.
“There are all kinds of structural reasons behind that – such as the return of interest rates in Japan and problems with Japanese government bond exposure – instead of which, these allocators are now increasing their own market equity weight. The point is, it is happening – Japan is buying Japan. One of the richest investors in the world is returning to its own market. Why would you not join the cavalry attack?”
Some of the most important companies in the artificial intelligence supply chain are Japanese – and they are getting noticed for their role.”
The second factor Kaye highlights is Japan’s currency. “Like other unpegged Asian currencies, the yen has almost halved versus the dollar since 2020,” he explains. “A range of factors, however – including intervention by some of the most powerful forces on the planet and a narrowing of the interest rate differential between Japan and the US – are supporting the yen right now.” That would mean, Kaye adds, that any sterling or dollar-denominated returns on investing in Japan are likely to be compounded by currency moves.
Bolstering these first two arguments is the fact that overseas investors are also turning their attention to Japan. “As I said, Japan itself is buying Japan – but Mr and Mrs Foreigner are also starting to recognise that there is an awful lot of change going on in the country right now,” observes Kaye.
“Companies are talking about governance reform, for example, while some of the most important companies in the artificial intelligence supply chain are Japanese – and they are getting noticed for their role. And so the flow of foreign capital is compounding the flow of domestic capital into this market.
“No other market on the planet has all this stuff going on right now. These inflection points are happening at the moment, as we speak, and they are why a Japan allocation has to be considered – and even augmented – in our view.”
‘Great companies, great opportunities’
Asked why investors should allocate to Japan equities via the Comgest strategy rather than any of its peers, Kaye first picks out the company’s heritage in the asset class. “Our founders started looking at the Japanese equity market back in the 1970s and we have had a presence in Japan for over two decades,” he says.
“Being on the ground in Japan – I speak Japanese and have spent over my half my life in that country – gives us an indispensable approach to the greatest minds behind some of these great companies that are great investment opportunities.”
For Kaye, that ties into Comgest’s “multi-decade tradition of investing only in great companies – in our fund and in our company”. “We are known as people who are not distracted by market noise,” he continues. “And, in a world where market noise has become only ever more distracting, that focus on one approach of investing in great companies has served us very well.”
Kaye concludes by pointing out the Japanese market has, for the last few years, been “somewhat hijacked” by a single type of investing and asset allocators would now do well to consider an alternative. “Loosely speaking, the collapse of the Japanese yen has led to an extreme concentration of capital on the part of new buyers in a few sectors only – for example, low-quality exporters,” he explains.
“That trend is starting to peak out, however – some people say it is even beginning to reverse. Our fund, which invests only in good companies with high visibility, suffered during those three years of madness – but we have outperformed for almost two years now We believe we are one of the most honest and fair expressions of quality investing because we have not changed from what we always did – investing in great companies. And we have unprecedented interest in what we are doing right now in this dynamic market and with the proven approach that we have.”
Richard Kaye, portfolio manager, Comgest
A full transcript of this interview can be found after this box while you can view the whole video by clicking on the picture above. To jump to a specific question, just click on the relevant timecode:
00.00: Why should wealth managers be allocating to Japan in general?
01.03: Why invest in Japan equities now?
03.24: Why should investors allocate to your strategy rather than one of your peers?
Why should wealth managers be allocating to Japan in general?
Thank you for that question – and it is a very important one because Japan is the most exciting market, in our view. Why? Because we have some of the most innovative companies on the planet in the Japanese market, who are not by any means tied only to the affairs and the destiny of the Japanese economy and country and archipelago.
They also have exposure to global trends, whether that is the artificial intelligence supply chain; whether it is the emergence of the Asian consumer; whether it is the transformations going on in a range of global industries, where the Japanese companies are often consolidators and drivers of change – all of those themes the Japanese market offers.
And it is not understood. It is a market that in fact, for 30 years, has been in decline so analyst coverage has significantly declined – and we feel that portfolio managers’ allocations need to be rethought dramatically, given the opportunity this market presents.
Why invest in Japan equities now?
There are three major changes or inflection points – whatever words one wants to use – which are occurring right now. One is that the Japanese market’s local investor base – from ‘Mr and Mrs Watanabe’, as they are sometimes called in the official jargon, to the behemoth institutional investors of Japan, which includes some of the biggest investors on the planet, such as Japan Post Bank – are increasing their allocation to Japan equity right now, from a very low base.
There are all kinds of structural reasons behind that – such as the return of interest rates in Japan and problems with Japanese government bond exposure – instead of which, these allocators are now increasing their own market equity weight. The point is, it is happening – Japan is buying Japan. One of the richest investors in the world is returning to its own market. Why would you not join the cavalry attack that is going on in the Japanese market?
A second major inflection point that is happening involves the Japanese currency. Like other unpegged Asian currencies, the yen has almost halved versus the dollar since 2020. A range of factors, however – including intervention by some of the most powerful forces on the planet and a narrowing of the interest rate differential between Japan and the US – are supporting the yen right now, which means that, of course, your sterling or dollar-denominated returns on investing in Japan are probably going to be compounded by currency moves.
And there is a third factor, which is that the foreign investor base is also starting to discover Japan. As I said, Japan itself is buying Japan – but Mr and Mrs Foreigner are also starting to recognise that there is an awful lot of change going on in Japan right now.
Companies are talking about governance reform, for example, while some of the most important companies in the artificial intelligence supply chain are Japanese – and they are getting noticed for their role. And so the flow of foreign capital is compounding the flow of domestic capital into this market.
No other market on the planet has all this stuff going on right now. These inflection points are happening at the moment, as we speak, and they are why a Japan allocation has to be considered – and even augmented – in our view.
Why should investors allocate to your strategy rather than one of your peers?
Thank you. There are three major factors I want to highlight. One is that we have been in Japan an awfully long time. Our founders started looking at the Japanese equity market back in the 1970s and we have had a presence in Japan for over two decades.
We believe that being on the ground in Japan – I speak Japanese and have spent over my half my life in that country – gives us an indispensable approach to the greatest minds behind some of these great companies that are great investment opportunities.
Secondly, we have a multi-decade tradition of investing only in great companies – in our fund and in our company. We are known as people who are not distracted by market noise. And, in a world where market noise has become only ever more distracting, that focus on one approach of investing in great companies – which we try and test with all sorts of metrics, as well as meeting the people behind them – has served us very well.
Yet there is a third factor I want to mention that makes this conversation right now extraordinarily relevant. The Japanese market, for two or three years, has been somewhat hijacked – if we may express it that way – by one particular type of investing, which is politely called ‘value investing’. I do not like that expression myself because I do not think there is value in it.
Loosely speaking, however, the collapse of the Japanese yen has led to an extreme concentration of capital on the part of new buyers in a few sectors only – for example, low-quality exporters, especially commodities companies and so on. That trend is starting to peak out, however – indeed, some people say it is even beginning to reverse.
Our fund, which invests only in good companies with high visibility, suffered during those three years of madness – but we have outperformed for almost two years now as, again, those madness trends have eased and perhaps started to reverse.
We believe that we are one of the most honest and fair expressions of quality investing because we have not changed from what we always did – investing in great companies. And those forces of distraction – the hijacking of the market – seem now to be somewhat behind us.
And, again, that makes this moment particularly important for looking again at a strategy like ours. We have 17 years of consistent team history – the co-portfolio manager and I have worked on this fund together for that time. We have $4bn (£2.4bn) of strategy size. We are in fact at our peak level – we went down a bit during the strange years and then came back again recently. And we have unprecedented interest in what we are doing right now in this dynamic market and with the proven approach that we have.
