VALUE: After Hours (S08 E09): Why Europe and Japan Offer Hidden Value Investing Opportunities

During their recent episode, Taylor, Carlisle, and Alex Roepers discussed Why Europe and Japan Offer Hidden Value Investing Opportunities. Here’s an excerpt from the episode:

[Alex] Yeah, so first of all, Japan is a market not to be overlooked. It’s a very important developed economy. It’s probably the most relevant developed economy in Asia, which is the largest, most promising growth continent as far as I can tell.

And so it’s really a preferred area that over a long period of time suffered not only from zero interest rates, no inflation and some empty or non-shareholder friendly policies, but also from a loss of market share within Asia. That’s less published. But China and Indonesia and Vietnam grew so much in terms of market cap, that if you think about somebody allocating, say Shell Pension Fund gives $10 billion to Goldman Sachs to manage in Asia, they would cover the indexes.

And it used to be 70% in Japan in 2000, that as a market cap, and it became only 20, 25% by 2020. So there was constant like market share loss for Japanese companies, lack of interest. But then when Abe came around in 2014, I think, he had the three arrows of economic growth, as well as improving public company behaviour, getting more independent directors, improving ROEs to share buybacks and acquisitions, et cetera.

So things have improved quite a bit on that front, on the governance front and on how Japanese corporate managements are more aware and more well-versed in also being a good steward of shareholder money. They are stewards of being wellness for society, wellness for workers, wellness for everybody. And those are important constituents.

They should not be ignored in any continent or country, but shareholders are kind of forgotten. And that has changed markedly, I think, with Abe. And it’s now continuing under the new prime minister, Saneha Takeuchi, who is very much a disciple of his whole philosophy in that account.

But we’ve been there, as you mentioned, since 2003 or four. I started investing in four, started analysing in three and being very successful actually there, doing our constructive behind the scenes activism, respectful, genuinely. If there’s any form of activism exportable to Japan, that would be the one and not the overt proxy battle, guns blazing one.

In fact, I had to defend myself in almost every meeting that with all due respect to a very nice guy, Warren Lichtenstein, who was there early, Steel Partners, who is not very well there in general. But are you like Steel Partners? They were asking.

So no, we’re not. We’re from the US, but I played my Dutch card. I said, you know, I’m Dutch.

You know, and the Dutch have 400 years of uninterrupted trade relations and they care about that stuff. So I say, how’s it me, master? Which is nice to meet you.

And a couple other things that it makes you that you are interested in speaking some Japanese. And so with all that kind of charm and laughing and this and that, we’re able to get pretty far with our due diligence. But then also, you know, we make our proposals of share buybacks and dividends and some portfolio rationalisation.

And we write that up and then we write it up again in letters to them. And if they don’t really act on it, said, yeah, now you’re, you know, we’re giving you all these nice proposals. You can do them.

We don’t want any credit. It’s all you. But if you’re not gonna do anything and the stock is still going sideways, you’re forcing us to broaden the conversation with other constituents.

So what do you mean with that? Well, we could file a proposal for the annual meeting to put it to a vote. And that means there’s publicity with the financial press, which we know well.

And, you know, it’s not good because then we talk about the fact that we do this against our will, not the way we like to do it. And we’re doing it because you are not acting. You’re lethargic.

Oh, and so that’s kind of pressure, very much verbal behind the scenes has caused some changes in a number of companies where we had to do it. Not too many. Most of them started to adopt some of these proposals and we were happy with the share price.

And then we left and we came back later. Some had got a little bit more confrontational and those we actually, we had some success rates applying some more subtle pressure, if you will, behind the scenes. We actually never had to file an actual proposal, which we didn’t want to do anyway, but we had a fairly credible threats and some good arguments that convinced them to act that way.

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VALUE: After Hours (S08 E09): Why Europe and Japan Offer Hidden Value Investing Opportunities

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