SINGAPORE: Ed Rogers, who runs a fund of hedge funds in Tokyo, is adding another activist to his lineup, betting the strategy will pay off as Japanese firms become more open to overhauling their businesses.
Rogers’ Wolver Hill group, which already allocates about 5% 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%, he said. He declined to identify the funds. 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 Corp. 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 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,” 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 paypromote further unwinding of so-called cross-shareholdings, stock that companies and institutions hold in listed peers to cement relationshipsencourage 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 Rogers’ 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 Abe returned to power in December 2012. It added to those gains yesterday, rising 0.4%.
Hugh Young, head of Asia for Standard Life Aberdeen Plc, which has US$924bil 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, he said. — Bloomberg
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