Masakazu Takeda: Japan is culturally a very unique country. Some of the unique aspects include different management philosophies, different ways of doing business, different labor practices, and not to mention the language. We believe that you need a local investor with deep knowledge and local insights to perform well in this market.
As an active manager, we believe that a concentrated, long-term oriented portfolio is the best way to produce market-beating returns over time. If you have too many stocks in your portfolio, it certainly helps to average out the declines in the stocks across your portfolio and smooth out the portfolio return in the bear market, but it cannot escape the market force of the down market. On the other hand, if you have only a few stocks in your portfolio, and if you choose those names correctly, then there's a good chance that your portfolio will actually go up in value despite the overall bear market.
Key Investment Criteria
Our mantra is "invest in a great business with exceptional management at an attractive price." And, our definition of intrinsic value is the present value of all the future cash flows to be generated from a business, so to that end, we strive to invest in companies with high returns on equity, number one, and number two, sustainable and predictable, above-average, long-term earnings growth rate. And number three, strong cash flow generation. Because we want to invest in these companies for the long-term, through economic cycles, we want to make sure that our companies have a long-term, proven track record with a time-tested business model.
Focus on Global, Blue Chip Companies
We're large-cap investors and because of that, we prefer to invest in global Japanese companies with scalable businesses, in particular, we prefer to invest in global blue chip companies. We think investing in global blue chip companies can be a natural hedge against currency swings. What I mean by that is, from a U.S. dollar investor perspective, if the yen depreciates against the dollar, it reduces the dollar return on equity, but it improves the competitive advantage of the business abroad. And that should boost the earnings of the business and dollar investors will be compensated by that. On the other hand, if the yen strengthens against the dollar, it will immediately improve the dollar return on equity while making the business less competitive abroad. But, over the long term, global blue chip businesses can overcome the strong yen through secular volume growth of their business.
Market Conditions and Portfolio Performance
Our aim is always, first and foremost, to protect the downside as much as possible. So in relation to the benchmark, we tend to do better in a bear market than in a bull market. In a rising market, we are generally happy just to keep pace with the benchmark, or in some years, we may even lag slightly. We also need, as a bottom-up fundamental stock picker, we need a fundamentally-driven stock market for our portfolio to be rewarded.