Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Prompted by the corporate governance revolution taking place, the Japanese market offers a significant multi-year investment opportunity. Launched in April 2023 by two Japan specialists, Zennor Japan Equity Income Fund is a UK OEIC that takes advantage of several ‘unique-to-Japan' factors. The fund is actively managed without reference to a benchmark, provides the potential for dividends to grow strongly over time, together with the opportunity for long-term capital growth by investing mainly in companies listed, domiciled and operating in Japan.
Applying a simple philosophy, the managers looks for companies whose share price is trading below their intrinsic value with material upside potential - triggered by a catalyst. The catalyst is a way to accelerate the move from the company's current share price to the intrinsic value target. A typical catalyst could be a change in operational or balance sheet strategy, a change of management, improving earnings or governance, or the emergence of a genuine activist on the shareholder register.
Combining the best of traditional value and growth investment approaches, and including the integration of material ESG factors, the managers identify companies with clear signs of undervaluation: overlooked assets, mispriced cashflows, or where earnings could be higher. The fund invests across the market cap spectrum and aims to generate long-term outperformance and generate income by buying the best opportunities and holding them through the catalyst.
Zennor Japan Equity Income is managed by an experienced team of stock pickers who combine their complementary backgrounds, and their in-depth knowledge and market experience in pursuit of larger potential returns.
How are you positioning your portfolio?
The portfolio is organised around three broad categories of stocks; overlooked assets, mispriced cash flows and under earners. We currently we have a higher than usual exposure to overlooked assets - partly as a function of the Tokyo Stock Exchange induced pressure to improve returns and address ‘persistent undervaluation'. It is in these very strong balance sheet stocks where the pressure is greatest.
The portfolio is oriented towards domestic companies - with strong balance sheets. This is because we see more bottom-up opportunities here. Domestic consolidation, alongside better pricing power, is a powerful catalyst to higher earnings which is not yet reflected in valuations. The scope for better business models to create value in the fragmented domestic market is very large and is under-researched analysts and investors. We expect that this will be a multi-year theme, as low margins and low multiples provide significant opportunity for some stocks to appreciate significantly.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The key theme that runs throughout the portfolio is the change engendered by the revolution in corporate governance. One recent purchase is a company that's focusing on its higher-return technology businesses, whilst it exits legacy, underperforming assets. The company is deploying its balance sheet, including non-core operations, excess real estate, cash and investment securities to fund this transition. In our analysis this sees them move from value destruction to meaningful value accretion. The current 0.6x PBR, 0.4x price/sales and 7x earnings do not reflect the business that they are becoming, but rather the outdated historic perception. One reason for this is that the one analyst covering the company has not included the latest acquisitions and disposals in their modelling. These represent a shift of more than 20% change from autos to technology, and a big increase in profitability and returns. Our recent conversation with the CFO reveals their determination to execute the transition. This $4bn revenue company is simply overlooked, under-covered and off most investors radar for now… This company is far from the only example of companies transitioning their business models, and where the change is not currently reflected in valuations.
