Finding Attractively Valued Japanese Small-Caps

Portfolio Manager Tad Fujimura discusses the effects of the Russian war in Ukraine on Japanese companies, how the Fund is positioned, notable changes in the portfolio, and a few holdings he believes are trading at a discount with attractive growth prospects.

April 2022
  • Tadahiro Fujimura
    Tadahiro Fujimura, CFA, CMA
    Portfolio Manager
  • Takenari Okumura, CMA
    Takenari Okumura, CMA
    Portfolio Manager

Given the Russian war in Ukraine and subsequent sanctions placed on Russian goods, what impact could a lack of access to Russian commodities, such as palladium, copper, and nickel, have on Japanese manufacturers and robotics?

Materials such as copper and nickel are indispensable for electronic equipment but the cost to sales ratio of such materials is low for machinery and robots. Therefore, the impact of higher raw material prices is minor than that of other industries, in my view. We do not expect to see an issue in procurement of such materials in the long term. However, in the short term, a lower production volume is expected due to the remaining impact from the last year of logistics disruptions, plant shutdowns caused by COVID-19 Pandemic, and shutdowns of semiconductor plants.

With Japan’s reliance on energy imports, what have the effects been of the Ukraine crisis on the Japanese economy and markets in general?

Although the energy import directly from Russia is small, the impact of higher liquefied natural gas (LNG) and oil prices is a major issue for Japan. We do not think replacing thermal power with renewable energy is an immediate solution. 
The resumption of nuclear power generation is economically required, but it is a politically difficult issue. The reopening of nuclear power plants and expansion of renewable energy sources will be issues over the long term.

How have the recent stimulus packages helped small businesses in Japan?

Subsidies for restaurants and services, which have been impacted negatively by COVID-19, continues. As a result, small Japanese businesses with weak operations survived, but this supporting policy has not improved their efficiency. Rather, a stimulus package to improve productivity should be introduced, in our opinion.

How is the Fund positioned in the current shift from growth to value?

We are not conscious of growth or value, but we have increased our investments in stocks whose share prices have fallen and became too inexpensive, in our view, since the second half of last year. As a result, allocation to so-called value names which are more cyclical increased over the quarter. Currently, we are accumulating positions in service industry benefitting from economic normalization and being less impacted by inflation.

Would you please discuss any notable additions to/deletions from the portfolio over the past quarter? 

We have initiated an investment in Macromill Inc., a large internet-specialized research company, since the second half of 2021. As the cookies of browsers will be regulated, we expect that there will be an increasing demand for online surveys. In addition, we evaluated the company as it cut back overseas operations which had been unprofitable.

We sold the Rorze Corporation, which had risen significantly due to favorable semiconductor market conditions, to take profits.

Please provide a few examples of holdings you believe are trading at a discount with attractive growth prospects.

We reinvested in Lifenet Insurance Company, which specializes in internet life insurance. The company made an accounting loss due to a special accounting treatment for insurance however the value of the insurance premium paid by holders is 2 times larger than the value of company’s current market capitalization. The stock price of the company has plummeted together with other start-ups. The number of holders continues to increase by more than 10% annually, and we believe that the company has growth potential backed by a solid strategy including alliance with other firms. 

We accumulated positions in Ship Healthcare Holdings, Inc., which provides consulting services for hospitals and other services. The share price of the company has been sluggish on downward earnings revision due to disrupted operation of hospitals caused by COVID-19, and delays in new medical equipment contracts. In addition, the shortage of semiconductors has made it difficult to procure medical equipment. We believe that consulting and equipment sales will increase significantly on the back of economic normalization and an increasing demand to improve efficiency within healthcare sector.