We sat down in 2012 with Amit Wadhwaney for a wide-ranging interview on global value investing. Included below is the portion of the interview that focused on investing in Japan.
Amit Wadhwaney has managed foreign stock portfolios since 1996. He has been particularly interested in emerging economies where he has long believed that market inefficiencies favor bottom-up value investors.
The following transcript has been edited for space and clarity.
The Manual of Ideas: How do you approach Japan? What is different about your approach and why do you see value in Japan?
Amit Wadhwaney: Now, a couple of things. Japan, if you were focused on safe and cheap and forgot about everything else your portfolio would have nothing but Japan in it. It is very, very cheap. Numerically it’s very cheap. And companies are often flush with cash. It is neglected, it is disliked, it meets many of these criteria that draw people — some would say suckers — like us. There’s a whole collection of value investors there gnashing their teeth and wondering, what is it that we do and have done?
…if you were focused on safe and cheap and forgot about everything else your portfolio would have nothing but Japan in it. It is very, very cheap.
First, before last year, before 2011, disproportionally to my mind value existed in the domestic companies — disproportionally, by a big margin. Exporters were battle-hardened. Locally, Japanese companies have been constantly coddled, and the local companies tend to operate quite differently.
So our focus was on domestic companies. They all met the safe and cheap criteria. Now, the question of course you ask is after some years of requisite impatience and nothing happening, how are we going to make money here? That’s the question everybody asks. So having been worried about that same question some years ago earlier, having watched — you must understand, my history with Japan goes back to the early to mid 1990s. And Japan has been a place where you invest and you wait and wait and wait and suddenly make money, lots of it and very fast. It’s always been this sort of hockey stick phenomenon. It’s like watching paint dry.
Now, this time may be different. I don’t know, I can’t tell you. But the way I’ve approached this is you buy things, you put yourself in the path of some kind of change, change which may come from the companies themselves doing the right sort of thing. So we don’t buy perfect companies. Let me be very clear about this. Are these great capital allocators? Often not.
Let me give you an example of one of our holdings which we have, which has done everything right except for one of the most important things. Mitsui Fudosan [Tokyo: 8801] is a magnificent real estate company, almost near trophy real estate. A great balance sheet, growing the top rapidly. It’s building. They’re building buildings; they’re doing all the right sorts of things. However, what’s the rub? The rub is the following. You’re building buildings there with cap rates of 5% when you can repurchase shares at high single digits like 9-10%. To my mind it’s not a very big leap of imagination that gets you there. Yet, for the last number of years they visited us here, for the last number of years we asked them, “Why do you not do that?” They said, “No, no, no, we have to grow the business.”
So the business is growing. It is cheap. And it may stay cheap for a while. However, value is building. We are waiting for the lightning bolt to hit there.
MOI: So what do you say to people who when you tell them about your approach to Japan and then they say, “Well, yes, I get what you’re saying but how do you get over this corporate governance?”
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