Illuminating Monday morning reading from Forbes:
Rising Sun
By Andrew Tanzer
THE NIKKEI INDEX'S RETURN TO life, up 50% in 1999 and 4% this year, doesn't wow Richard Whittall. "Buying the index is tantamount to suicide," thunders the senior fund manager of Jardine Fleming Asset Management. "Anyone who buys the index in Japan is an idiot."
Harsh words, but the Nikkei-avoidance philosophy of Tokyo-based Whittall has more than panned out. His strategy: Snub the plodding old giants in the Nikkei and go for the entrepreneurial hotshots that are sprouting up in Japan. Last year his $1 billion JF Japan Trust returned 418%, and his JF Japan Technology Trust soared 559%, making them the best-performing offshore Japan funds. While offshore funds are tough for Americans to invest in, you can follow Whittall's advice for individual Japanese stocks, which are open to investment by American and other foreign investors.
The tech-heavy New Economy a-borning in Japan invokes rhapsodic praise from Whittall, a 35-year-old Japanese-speaking Briton. He has built his funds' rich returns by a talent-spotting process that has produced a host of un-Japanese-like upstart performers in services, telecom and technology.
As the manager of $3.5 billion for Hong Kong-based Jardine Fleming, Asia's largest home-grown fund manager, he is vociferous in his contempt of traditional Japanese companies, regardless of how cheap they are. To him, they carry too much baggage and are too slow to restructure.
"Yes, restructuring is happening in Japan, but in many cases prepare to be disappointed," he advises. That's why Whittall holds no bank, utility, steel, petrochemical or construction companies. "Many companies in Japan are structurally doomed," he explains. "On top of that, the management is doomed."
Whittall, who forecasts that the Japanese economy will eke out 1.5% growth this year, complains that the pace of bankruptcies and creative destruction has been far too slow. Businesses not managed for the shareholders, where workers are sheltered and incentives are nil, hang on forever.
Corporate chiefs, 80% of them chosen by predecessors, tend to take over at age 59. These lifers, Whittall laments, are clueless about overhauling the companies. Industry overcapacity and inbred bureaucracies make a joke out of what restructurings exist. Japan has 20 shipbuilders, he says, and even if you restructure them, they still face Korean competitors who work at half their cost and Chinese ones who are still cheaper.
Apart from staying pretty rigidly out of certain old-money sectors, Whittall has a few rules of thumb that tell him whether he has a forward-looking or a backward-looking company. He is leery of any with large financial cross-shareholding relationships, which can foster incestuous business dealings between companies and their shareholders. (Cross-shareholding still accounts for 37% of Japan's stock ownership.) Why be a minority investor?
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"RESTRUCTURING IS HAPPENING IN JAPAN, BUT PREPARE TO BE DISAPPOINTED."
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And too many old-style companies hide rotten assets, which makes the concept of value plays very tricky. For instance, foreigners were attracted to Tomen, an import-export outfit selling at book value. Then, suddenly, new accounting rules forced Tomen to write off $4 billion--equal to its entire equity--when it marked to market bad real estate investments.
"Many cheap companies in Japan are expensive, and many supposedly expensive companies are actually good value," he reasons. In other words, if the company blows up, you just lost your costly investment. But Whittall figures many in Japan's New Economy are terrific alternatives with big futures.
Sounds like starry-eyed growth investing, right? Not quite. The best way to look at Whittall's hot picks is in price-to-sales terms (see table). We've culled some of the more reasonable ones that also look like long-term winners in their sectors. Some of these nevertheless have high P/Es. But Whittall argues that they are so well managed and have so much room to roam in the moribund Japanese economy that a high multiple is warranted.
Take Hikari Tsushin, a telecom-equipment retailer with an active venture capital arm. A young, entrepreneurial firm, it has executives who would fit right in in Silicon Valley. Hikari, trading at 11 times sales, plans to take public 50 of its venture investments within a year. Whittall calculates Hikari's stake in these businesses will be worth as much as the parent firm's $27 billion market value.
Meanwhile, the future looks good in Hikari's booming operations selling cellular phones and the like. And last year the entrepreneurial firm launched a mushrooming new business of peddling domain addresses and leasing servers to Japan's millions of small and medium-size enterprises, enabling them to access the Internet.
After a late start in Japan, Internet growth is exploding, but with even more far-reaching consequences for commerce than in the U.S. Whittall, who calls Japan the "land of the middleman," says the Internet could potentially take a buzz saw to the country's inefficient layers of wholesalers and retailers. Both business-to-business and business-to-consumer Net operations, he says, "will be a tsunami."
Unlike in the U.S., most Japanese will access the Internet through cellular phones, not the personal computer. Whittall notes that NTT Mobile, the dominant cellular operator and one of his core holdings, has 25 million customers, more than America Online has in the U.S.
Tech is not the only realm of the entrepreneur now beginning to crop up across the Japanese corporate landscape. Whittall also finds alluring non-Internet plays in Japan's grossly underdeveloped service sector. For instance, one of his favorite stocks is the Goodwill Group, which, with a roster of 20,000 workers, supplies temporary labor to companies outsourcing blue-collar jobs such as inventory control. He's particularly excited about Goodwill's new service of supplying home health care to the country's expanding ranks of the elderly.
And Whittall also loves how open the freewheeling management is. He sat down with Goodwill's president four times in January and February, unheard-of access for a money manager in Japan.
Whittall doesn't spend much time fretting about Japan's dismal politics, sluggish economic growth or other problems. He expects, over the next five years, that many of his upstart companies' stocks will go up 10, 50 or even 100 times. They would have to, to make up for all the money that has been lost in the last decade on Nikkei stocks. |
