Jean-Marie Eveillard's Musings On Japanese Equities

Investors who acquire over a 5% stake in a listed Japanese company must file a report with the Japanese financial authorities within a few days of going over the 5% threshold level. So if you are interested, as I am, in global value funds' investments in Japanese equities (think Southeastern, Third Ave, Silchester Investors International etc) it is very easy to be able to track them in near-real time once they breach the 5% level.

The caveat being you need to read Japanese and know how to use the EDINET filing system to unearth what you are looking for. If you are interested, you can click on the 5% filing rule link on the right hand side of this blog although the details are in japanese otherwise you can e-mail me and I can send you a list of some big funds filing codes in Japan.

I have noticed that Jean-Marie Eveillard's First Eagle Funds/Arnhold and S. Bleichroeder Advisers have been very active in acquiring stakes in Japanese companies over the past six months from their filings with Japanese regulators.

Anyway, I was reading the latest (May) First Eagle Funds' Conference Call transcript and Mr. Eveillard had a number of interesting things to say about Japanese equity prices. In particular, his musings on net-nets among the Japanese small cap space were particularly interesting as this is something I have touched on before and am looking at establishing a basket position in too.

Also his remarks on SMC may be worth looking at further, there is a write-up of the company over at Value Investors Club and for non-Japan based investors the company's stock trades on pink sheets in the United States.

Finally, he had interesting things to say on currency risk exposure for exporters and how to think about this, and also Japanese insurers - Controlled Greed has a position in Millea, and other value mutual funds are keen on names like NipponKoa, Millea etc.

Edited highlights below

"Today, the Ben Graham-type companies, in other words, the deep value stocks, are not available, really, in the U.S. or in Europe. They’re only available in Japan.

And then, the great majority of those deep value stocks are small stocks... we have been doing some work and we already own a few, have owned sometimes for years, a few small deep value stocks in Japan and we’re in the process of doing some additional work on more.

I mean there are stocks in Japan where net cash, cash and sometimes portfolio securities, net of all financial liabilities, net cash is in excess of market cap, which means that you pay less than nothing for the business. Now, as Marty Whitman likes to say, “There is always something that can go wrong.” In that case, if the company were to suffer a string of losses for the next five years, then of course five years from now the cash would have disappeared as a result of the losses.

... in the Tokyo stock market, there are a few industrial companies, some of them world-class, where the stocks had declined to levels where valuations, we thought, were very attractive. Now, when I say industrial, it implies, of course, cyclical, speaking very generally.

So, we assumed in those cases that operating profits would go down 30% over the next 12 months, which nobody assumes today, but just in case. And, we found out that even if we assumed that operating profits would go down 30% over the next 12 months for those companies, the valuations on that basis remain quite moderate. So, we own SMC, which is the world leader in pneumatic equipment...

We also own Keyence3, which is world renowned for their automation products. Again, I’m not saying that the Japanese economy is doing well; it’s doing so-so. I’m just saying that Japan is not going to sink into the sea and that we think we found some very specific investment opportunities among some Japanese industrial companies...

As I said before, we are long term investors, we hold securities on average for five years, which means that sometimes we own them for six, seven, eight, nine, ten years or more. So, we don’t pay a great deal of attention to whether the company is export sensitive or not unless we felt that number one, the Euro would be strong forever vis-à-vis the American dollar and number two, that the competitive advantage of the European company would be ruined truly by the strength of the Euro, which often is not the case.

I mean there are many German companies, for instance, that do not complain today about the strength of the Euro because they are selling, say, machinery that’s so complex and so competitively strong that price is a minor, not quite a minor factor, but price is not a considerable factor.

So, unless we thought that the Euro would be strong for the next three to five years, we don’t mind owning the stock of a company that either exports much to the U.S. or does a large amount of business in the U.S...

We own the securities of a few insurance companies outside the U.S., specifically in Japan. Although it’s a very particular case, I mean these companies in Japan are vastly overcapitalized. Most of the excess capital is invested in Japanese equities. So, we look at them and, so does Marty Whitman of Third Avenue, as disguised investment companies. "

Walter Schloss speech

Combined notes from a speech by Walter Schloss at the Ben Graham center for value investing and a Forbes profile of the man in Feb of this year

SEARCH STRATEGY
If there is an industry having a problem look at it and you will likely find a good buy there.
Do the companies pay dividends if the dividends are under threat then wait till the cut, see how much the price drops as they may become attractive.

Schloss likes to buy stocks hitting new lows.
Look for companies without much debt - this is important when company stumbles (and takes the stock price down with it).
With these companies it pays to focus on assets.
Has the book value been rising over the past few years? (e.g. five)

Stks below book value with long track history and inside ownership are good.
Look at annual reports and proxies how much stock directors own, company's history and who owns stock
Schloss doesn't like talking to management as they can sway your judgement, look at the figures instead.
Pay special attention to footnotes.

SELLING & ASSET ALLOCATION
Having target buy price is good move
As you scale your buys in so you should scale your buys out
If you really confident 20% should be max allocation