Japan is the world’s third-largest economy and home to global industry leaders in areas such as automation and medical tech. However, many companies remain under-researched, so those prepared to explore lesser-known areas of the market can find promising stories. I believe that a rigorous, bottom-up approach to active management can consistently identify companies where the market is underestimating or mispricing future growth, or there is a clear disconnect between near-term sentiment and mid-to-long-term fundamentals.
I tend to invest in small and medium-sized growth companies where I can find better business models and returns on equity, and management is more incentivised in terms of shareholder returns. Smaller companies, being relatively young and dynamic, are often able to create their own niche market and so may be able to grow regardless of the economic backdrop. Managers like myself, based here in Japan, have the opportunity not only to invest in established global leaders, but also to unearth less well-known companies (sometimes before they are listed), where lower levels of analyst coverage can often lead to great mispriced opportunities.
A great translation tool
Rozetta (Tokyo: 6182) offers online machine translation services – faster than human translators, at a tenth of the cost – to sectors including the medical, financial and legal industries. Its business metrics are impressive, with limited churn and high annual recurring revenues. It is shortly coming out with a new suite of products which should help it to penetrate the corporate manual market and is enhancing its distribution model to reach new customers. In future, I expect the development of machine-learning translations and even voice-based technology to be invaluable for Japanese companies where limited English language ability can often be a barrier.
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A play on healthier lifestyles
Shimano (Tokyo: 7309) is a global leader in bicycle components and fishing tackle. It is a long-standing, high-quality business with a solid management team which is taking steps to improve its environmental, social and governance (ESG) credentials. It is the dominant brand in the bicycle components market, due to its innovative technologies, high-quality products and strong aftersales service, so it should be a major beneficiary of the rising popularity of cycling in an increasingly environmental and health conscious world (a trend only reinforced by the Covid-19 pandemic and resulting avoidance of public transport). E-bikes also represent a new growth opportunity.
A turnaround medical tech play
Olympus (Tokyo: 7733) is a global leader in gastroenterological endoscopes. It is driving through structural change and improved governance via its “Transform Olympus” restructuring plan. A new chief executive took over in 2019, with a focus on optimising the medical device business, shrinking non-core operations (including the sale of its loss-making camera business), and improving cost controls. Olympus is also launching a new product cycle, featuring a next-generation endoscopy system that enables early detection and diagnosis through enhanced imaging quality. Its shares trade at a discount to its global peers despite these changes, suggesting attractive upside potential.
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