Japan Cash-Rich Company Equity

Investment philosophy

The Japan Cash-Rich Company Equity Strategy primarily invests in “cash-rich” companies, or firms which have a high level of liquid reserves. There is a particular focus on whether such reserves can be used effectively towards growth and the enhancement of shareholder returns. The strategy also emphasises the identification of catalysts; when investing in undervalued stocks, the investment team avoids falling into value traps by looking for companies with catalysts that could move their stock higher.

The strategy doesn’t limit its investments in terms of market cap segments or sectors, but instead looks at all Japanese domiciled companies that are likely to see earnings recovery or growth, or for which we have high expectations of a change in their capital management policy. While investing across all market cap segments, the strategy has a tilt toward undervalued small and mid-cap companies that are often under-researched.

How we capture value in the underinvested cash-rich company space

Capturing opportunities in the small-cap segment

The strategy has a small-cap bias. The Japanese equity market has a wealth of opportunities in this space, as demonstrated in the fact that a significant proportion of TOPIX companies have no sell-side analyst coverage. Many stocks in Japan remain cheap because they are under-researched and not enough information is available for investors. The strategy leverages on the robust proprietary bottom-up research capabilities of the Nikko AM equity investment platform, as well as the portfolio managers’ extensive knowledge and experience in the mid- and small-cap space.

Key Characteristics

Why invest in “cash-rich” companies?

There are three different scenarios for such investments; we believe any one of them will lead to high investment returns.

For illustrative purposes only. The diagram does not guarantee future performance

Corporate analysis and stock selection

Broadly speaking, the investment team seeks mispriced stocks from two different perspectives: structural and cyclical. Through this process, they seek stocks that are mispriced due to excessive pessimism, misconception or simply being neglected by the market.

The focus of the research is in identifying high quality companies that are competitive and have the ability to generate cash flow. The following are examples of key attributes that the investment team looks for:

Portfolio characteristics

• Approximately 100-130 names
• Primarily invests in ‘cash-rich’ companies
• Average holding period of three years and portfolio turnover of approximately 30 – 50%
• Focuses on undervalued and under-researched small & mid-cap names
• Generally keeps pace in up markets, while maintaining robust downside protection in down markets

Investment Process

Our three-step process to building a robust portfolio of the best cash-rich companies