An Aggressive Hedge Fund Bucks Stock Rout by Pushing Japan Firms
(Bloomberg) -- One Japanese hedge fund posted a gain in the first three months of 2018, even as a rout rocked global equity markets.
Its secret, says founder Tsuyoshi Maruki, was twofold. First, Strategic Capital Inc. invested in companies that were so beaten down that their shares wouldn’t fall much further. Second, the activist fund picked firms with room to improve their governance, and pressed them to do just that, including by eliminating the decades-old Japanese practice of having a web of friendly shareholdings.
Maruki’s $146 million long-only fund, which generally holds eight to 12 small-cap Japanese stocks, rose 0.2 percent in the first quarter. While that might not usually be much to boast about, Japan’s benchmark Topix index tumbled 5.6 percent in the same period, and the Eurekahedge Japan Hedge Fund Index slipped 1.6 percent. His fund has advanced 184 percent from inception in 2012 through the end of March, versus a 119 percent increase for the Topix.
Maruki, one of Japan’s first champions of shareholder rights, takes a more aggressive approach than Japan’s new breed of so-called friendly activists. But he says many of the country’s smaller companies are run by managers who don’t really get capitalism, rather than having anything against it, and if they’re given the right advice, their stocks have huge room to climb.
“They aren’t bad people,” Maruki, 58, said of the executives. “Once they get more understanding of such things, their companies’ valuations can change utterly.”
Strategic Capital has already started proxy fights at three of its investments this year, including calling on them to sell all stock held in listed peers held to cement relationships. The firms are synthetic-textile trading company Chori Co., air-conditioning system maker Shin Nippon Air Technologies Co., and Tosho Printing Co. Chori and Shin Nippon Air posted stock gains in the first quarter.
Maruki’s performance has also been helped by companies that accepted some of his recommendations after he started holding their shares last year, including Kyokuto Boeki Kaisha Ltd., a trading house, and general contractor Asanuma Corp. Both firms added nomination and compensation committees, while Kyokuto Boeki also introduced stock-based compensation, he says. Kyokuto more than doubled in the past year, while Asanuma advanced more than 35 percent.
Maruki’s campaign against cross-shareholdings is aligned with the policies of Prime Minister Shinzo Abe’s government, which proposed steps in March to encourage companies to cut down on the practice, as part of a revised corporate governance code.
While cross-shareholdings have been decreasing, the decline among non-financial firms has been modest. Shares cross-held by all companies, including banks and insurers, fell to 15 percent of the market as of the end of March 2017, from 21 percent a decade ago, according to Nomura Institute of Capital Markets Research. The figure for non-financial firms dropped to 6 percent from 7 percent in the same period.
“Companies should not own any cross-shareholdings at all,” Maruki said.
Maruki called on Chori, which is 51 percent owned by Toray Industries Inc., to sell its cross-holdings within three years. He also urged the company to increase its dividend and pay bonuses to directors only when it achieves its return on equity goal of 10 percent. Chori held shares of 35 listed companies at the end of March 2017, according to Strategic Capital’s shareholder proposal. A spokesman for Chori said the company is considering a response to Maruki’s proposal based on the Companies Act.
Maruki also urged Shin Nippon Air and Tosho Printing, which is 51 percent-owned by Toppan Printing Co., Japan’s biggest printing company, to sell such shares. Shin Nippon Air had stock in 63 listed companies at the end of March 2017, according to Strategic Capital. A spokesman for Shin Nippon Air said it will decide a response at a board meeting later in May, while Tosho Printing said it will respond after examining Strategic Capital’s proposal.
After spending 17 years at Nomura Securities Co., Maruki was a co-founder with Yoshiaki Murakami of a homegrown activist fund in 1999. The fund attempted the first hostile takeover by a Japanese investor the following year -- of electronics parts and real estate company Shoei Co. After Murakami was convicted of insider trading, Maruki oversaw the return of money to investors and closed the fund.
“In Japan, there’s still a negative image of activists, although it’s been dispelled to some extent,” said Kengo Nishiyama, a senior analyst at Nomura Institute of Capital Markets Research. “Even if their proposals are the right things to do, they haven’t gained enough understanding from other shareholders. But it’s also true that activists can stimulate the market and companies.”
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