Japan Activist Seeks to Triple Assets After Flying Start

(Bloomberg) -- Japanese activist firm Strategic Capital Inc. is targeting foreign investors as it seeks to triple assets after its founder’s aggressive tactics helped the fund outperform rivals.

The fund returned 6.8 percent in the first four months of the year, outperforming the Topix’s 0.9 percent increase and the Eurekahedge Japan Hedge Fund Index’s 1.7 percent gain.

Fueling the gains is the investment approach of founder Tsuyoshi Maruki, who is willing to wage confrontational campaigns at odds with corporate Japan’s more cosy relationships. His latest target is pump-maker Teikoku Electric Manufacturing Co., which he urged to return excess cash to shareholders through increased dividends.

“Japanese corporations are changing slowly,” Maruki said in an interview in Tokyo. “They are increasing dividend payouts and trying new things. Still, more needs to be done.”

While Maruki’s approach has made it hard to win the backing of domestic institutions -- many of which have business ties with listed companies and are loath to damage those links -- he is starting to garner interest from overseas investors.

Strategic Capital has established a currency hedge class to make the fund more attractive for offshore investors as it seeks to boost funds under management to $300 million, said Henry Wake, the firm’s head of marketing and investor relations. The fund aims to work with long-term investors such as family offices, endowments and foundations, because its strategy tends to take time for gains to be realized, he said.

Successful Start

Maruki’s fund gained 7.9 percent even as the Topix fell 1.9 percent last year. This year, returns have been bolstered by a number of successes.

He targeted Teikoku after the firm raised about 2.9 billion yen ($26 million) in 2014 to invest in new factories and machinery, a move Strategic Capital considered unnecessary as it boosted the company’s cash to 8.3 billion yen as of September 2016.

Three weeks after Strategic Capital submitted its shareholder proposal for a higher dividend, Teikoku last week said it will increase payouts and buy back shares, sending the stock to its biggest daily gain in 16 months. The shares are up 12 percent this year.

His four-year battle with Japan Digital Laboratory Co. paid off when it was taken private by its parent company in February, generating a return of more than 30 percent for the fund.

And Strategic Capital sold its stake in commercial refrigerator and freezer maker Daiwa Industries Ltd. that month after the stock tripled from when it first started investing in December 2012.

Daiwa shares rose to the highest in almost 11 years in early Tokyo trading Thursday, while Teikoku Electric was unchanged.

Family Ties

The fund has also invested in Nittoc Construction Co., which is 41 percent owned by a unit of Aso Co., a family business empire run by the nephew of Deputy Prime Minister and Finance Minister Taro Aso, who has been leading the government’s push for improved corporate governance and shareholder returns.

Maruki’s bet the family ties would prompt the company into action has born fruit, with Nittoc shares surging about 20 percent this month after the firm said it will boost shareholder returns via increased dividends and share buybacks.

Strategic Capital also finds value in firms controlled by their parent companies, such as Tosho Printing Co., which is 51 percent-owned by Toppan Printing Co., Japan’s biggest printing company; and Chori Co., a textile trader 51 percent-owned by Toray Industries Inc. Both stocks have gained more than 50 percent since the fund invested in them.

“As a majority shareholder, the parent company can pass anything,” he said. “What about the rights of shareholders other than the parent company? If you can’t explain the business reasons for owning such a large stake, you might as well take the unit private.”

To contact the reporters on this story: Kathleen Chu in Tokyo at kchu2@bloomberg.net, Komaki Ito in Tokyo at kito@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Peter Vercoe, Paul Panckhurst