Earlier this year, I joined the Directors of the Fidelity Japan Trust PLC as they carried out their regular due diligence visit to Japan. All too often much is made of Japan’s demographic challenges but the visit really turned my preconceptions on their head and it was a tremendous insight into the resilience and creativity of the Japanese people.
The trip takes place every 12 - 18 months and allows the UK- based Board the opportunity to “kick the tyres”, looking closely at some of the major holdings in the portfolio, and to review Fidelity’s investment and research processes. The Board consists of non-executive directors who are fully independent of Fidelity and has a responsibility to shareholders to ensure that Fidelity is doing its job properly. The Board also meets with economists and market specialists who enable it to formulate a good overview of the current backdrop in Japan and better understand the context in which Portfolio Manager, Nicholas Price, is investing.
In Tokyo we met with Zozo Group which runs Japan’s largest fashion e-commerce platform, Zozotown. It does not invest in inventory, but instead takes a commission on sales from over 6,000 brands on its platform, much like a department store operating a concession model.
The Company’s slogan of “Be unique. Be equal” is demonstrated in its distinctive corporate culture. All employees, regardless of rank, earn the same basic salary and bonus (dependent on annual profit) and women make up just over half of the workforce. Staff are also strongly encouraged to stick to a six-hour work day and leave the office by 3.00pm. This approach would be considered progressive in the West; in Japan it is revolutionary.
The Company’s founder, Yusaku Maezawa, started out as a drummer in punk band Switch Style, but made his fortune in the fashion world. He is believed to have a personal wealth of over £2bn and has famously put down a significant deposit with Elon Musk’s Space X to be the first ever private tourist to fly around the moon in 2023. In common with Musk, he is something of a social media phenomenon.
In January of this year, he entered the record books for posting the most retweeted message in Twitter’s 13 year history. In appreciation, he gave away 1 million yen (£7,250) each to 100 randomly selected retweeters from his own money. His posts are mentioned almost daily on national television and last month, when he announced that he would be taking a break from Twitter to focus on his “actual job” as president of Zozo Group, the company’s shares suddenly gained 10%.
While the company’s failure to launch the Zozosuit - a made to measure service, has hit the stock price hard in recent months, its unorthodox culture, exemplified by Maezawa, indicates an enthusiasm and ability to iterate towards success.
We also met with Hiroshi Hamada, CEO, of Japan’s largest specialist mortgage company - ARUHI. The company utilises cutting edge technology, including robotics and AI, to offer speedy loans to its customers, dramatically reducing the time required for paperwork procedures and screening. It can execute a loan within 3 business days while its competitors can take between 2 - 4 weeks to deliver a similar loan product.
Hamada maintains that despite listing on the Tokyo Stock Exchange in December 2017, the company retains “the spirit of a start-up company” and that while the mortgage loan business will continue to be core to its offering, the company has leveraged data and technology from this to develop a multi-platform business that integrates its customers, estate agents, financial institutions and consumer goods companies. Customers on the platform automatically qualify for various discount programs; free financial advice, local information, as well as other helpful tips for buyers and sellers alike. The multi-platform business continues to grow at an impressive rate. At the beginning of 2016 it had partnered with four companies; by December 2018 this number was 72.
Our next stop was Hamamatsu, a seaside city renowned for Unagi (eel) and being the birthplace of Yamaha Corporation. Unsurprisingly, given its association with the world’s largest manufacturer of musical instruments, it is known as the “City of Music” and even its tallest building, Act City Hamamatsu, is in the shape of a harmonica.
I was most struck by the immense variety of products Yamaha Corporation, and its spin off Yamaha Motor, has made over its 132-year history and it is fascinating to follow the company’s evolution. Its origins in organ and piano repair and woodworking attracted consignment during World War II for the production of airplane propellers; this then led to the honing of skills in developing motorised engines in motorcycles, boats, snowmobiles, among others.
Today Yamaha is also a producer of audio-visual products, semiconductors, machine tools, industrial robots and sporting equipment. At its innovation centre, the company’s “flops” are proudly displayed alongside successful products, serving to remind people that it doesn’t matter if you get it wrong; it is more important to give something new a try. This path of ingenious management and flexibility toward changing times ensure that Yamaha (nearly always) strikes the right chord with an ever-evolving world.
In Anjō City, we met with power tools manufacturer Makita. The company was founded in 1915 as an electric motor sale and repair company and became the first company in Japan to manufacture and sell electric planers in 1958. It was the explosive success of this product that led the company to realise the emerging potential in the power tool market and it was able to shift direction to developing a wide choice of tools which remains among the best (and most extensive) in the industry.
Today Makita has operations throughout the world and employs over 16,000 people. Roughly 80% of its products are manufactured outside of Japan. With close to 100 years experience, their products are lauded the world over for both their performance and quality. Innovation : Key to Makita's vision is the constant strive for innovation in their technology and their products. From their safety solutions like AVT and dust extraction, through to their Lithium-Ion battery and chargers technology, Makita is at the forefront for new ideas. This is all down to their dedicated research and development centre in Japan, where engineers work hard to constantly improve their products in all aspects, from power consumption through to ergonomic design and function. With close to 100 years experience, their products are lauded the world over for both their performance and quality. Innovation : Key to Makita's vision is the constant strive for innovation in their technology and their products. From their safety solutions like AVT and dust extraction, through to their Lithium-Ion battery and chargers technology, Makita is at the forefront for new ideas. This is all down to their dedicated research and development centre in Japan, where engineers work hard to constantly improve their products in all aspects, from power consumption through to ergonomic design and function.Key to Makita’s vision is the constant drive for innovation through its technology and products; from safety solutions like AVT (anti-vibration technology) and dust extraction, through to its Lithium-ion battery and chargers technology. Makita continues to be at the forefront of new ideas, due to its dedicated research and development centre in Japan where engineers work hard to constantly improve products in all aspects, from power consumption through to ergonomic design and function. Makita is also committed to training and is the only power tools manufacturer in the UK to offer City and Guilds approved training courses in the use of all its equipment.
The trip ended in Kyoto, synonymous with ancient temples, cherry blossoms, tea ceremonies and samurai. Less well known is that Kyoto is also home to Nintendo and a number of other high-tech companies. We met with one such company - Shimadzu, a producer of precision and measuring instruments as well as medical equipment. The company was founded during the Meiji Period (1868 - 1912) - a time of profound societal, political and technological change in which Japan moved from being an isolated feudal society to a modern industrialised nation-state and emergent great power.
Initially Shimadzu produced educational physics and chemistry equipment in Japan as an alternative to imported products. The company’s founders believed that one had to persistently overcome challenges based on creativity, innovation and not fearing failure and by 1918, it had developed and commercialised Japan’s first storage battery and medical X-ray systems.
Japan’s “economic miracle” following World War II led to significant demand for high quality products and Shimadzu developed analytical and measuring devices to assess the safety and durability of products as diverse as cars to infrastructural equipment to food stuffs and pharmaceuticals. The company remains dedicated to pursuing science and using advanced technologies and can boast to having produced a Nobel laureate (in 2002, employee Kouichi Tanaka won the Nobel prize for Chemistry for his contribution to the development of mass spectrometers).
There is an innate resilience and ability to be responsive to disruption in the Japanese psyche. This flexibility extends to corporate Japan where many companies have been able to remain relevant by evolving and shifting focus to meet challenges and demands as they arise. Specifically, with regard to innovation, Japanese companies filed 200,370 overseas patents, second only to the US, at the end of 2017.
Notwithstanding demographics, Japan is still the world’s third largest economy (behind China and the US) and since January 2013, the Nikkei Index has outperformed the World (ex US) Index significantly, and more broadly has substantially outperformed all major markets. In a recent article, Marina Gerner in MoneyWeek commented that investors have not yet priced such factors into markets and Japan’s Topix index’s constituents are currently much cheaper than the S&P 500 in the US.
The Fidelity Japan Trust’s manager, Nicholas Price has lived in Japan for over 25 years and is bi-lingual. In fact, he is so eloquent in Japanese that younger colleagues (who are born and raised in Japan) often have to look-up some of the words he uses. Nicholas is uniquely placed to understand and select companies to invest in across the market cap spectrum - from the very large, to the very small, making the best use of Fidelity Japan Trust’s listed company structure.
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