Sandy Nairn, who founded Edinburgh Partners Ltd. in 2003 after a decade working with Templeton, increased the proportion of his global stock fund invested in the world’s third-largest economy to 22 percent from 13 percent at the end of 2009. The division is now roughly in line with Europe and the U.S., where he has been reducing investments, Nairn said.
“There seems to be this view that the Japanese are congenitally uncompetitive and that wouldn’t be mine,” Nairn said in an interview at his office in the Scottish capital. “Just as in the early 1990s they were taking over the world, both of those views are completely wrong.”
That thinking from the heart of Edinburgh’s 500 billion- pound ($805 billion) fund industry jibes with predictions elsewhere that once people realize the value of Japanese stocks, prices will take off. David Herro, chief investment officer at Harris Associates LP in Chicago and Morningstar Inc.’s international manager of the decade, bought them last year and still calls Japan the cheapest developed market in the world.
Nairn, 50, whose firm oversaw 8.7 billion pounds at the end of 2011, is banking on being right to boost performance that has lagged behind rivals. His 100 million-pound EP Global Opportunities Fund (EPG) ranked 26th of 33 comparable funds in the three years ended April 16, gaining 38 percent versus an average 83 percent for its peers, data compiled by Morningstar show.
Motorbikes, Smoking
“Our performance over the past couple of years hasn’t been that great because this hasn’t happened yet,” said Nairn, who started his career in the 1980s investing in Japan.
Nairn cut the proportion of his investments in the U.S. to 18.4 percent at the end of 2011 from 23 percent two years earlier, according to annual statements from the global fund. The Standard & Poor’s 500 Index has rallied 9 percent this year on optimism the economy will recover more quickly.
Holdings in Japan include Shizuoka-based motorcycle maker Yamaha Motor Co. and Japan Tobacco Inc. (2914), the world’s fourth- largest cigarette producer, Nairn said in an April 23 e-mail. Yamaha has gained 7.7 percent this year and Tokyo-based Japan Tobacco has advanced 28 percent.
The average price-to-book value for companies in the Topix Index (TPX), a broad benchmark of Japanese stocks, is 1.18, compared with a ratio of 2.2 for the S&P 500 (SPX), according to data compiled by Bloomberg. Yamaha’s is at 1.3 times book value and Japan Tobacco is at 2.7, the data show.
‘Huge Strides’
That means Japanese companies on average trade in line with what their assets might be worth, while in the U.S., they are valued at more than twice their assets. They also trade at 13.9 times estimated earnings, compared with a ratio of 13 for U.S. companies, the figures show.
“If you look at corporate earnings in Japan from 1990 till today, they look terrible, but if you look from 2000, they look better than most developed markets,” said Nairn. “All it’s based on is that margins are very low and we think they’ll go up a bit because they’ve made huge strides in productivity.”
Nairn worked for Templeton Investment Management throughout the 1990s and was director of equity research. He became chief investment officer at Scottish Widows Investment Partnership, part of Lloyds Banking Group, in 2000. The Scot, who co-wrote the book “Templeton’s Way with Money” published this year, left to found Edinburgh Partners three years later.
Stifled Growth
Rival money managers in Edinburgh are less optimistic about Japan. The strain on the economy of more people retiring will continue to stifle growth, Mike Turner, head of global strategy at Aberdeen Asset Management.
Japan’s $5.5 trillion economy shrank 0.7 percent last year after the March earthquake and tsunami and will expand 2 percent this year before growth slows to 1.7 percent in 2013, the International Monetary Fund said in its latest report. About 23 percent of its 127 million people are older than 65, compared with 8.9 percent in China, according to the CIA Factbook, which cited figures from last year.
“We’re not dismissing it from a shorter-term perspective,” Turner said at his office in Edinburgh on March 29. “But from a longer-term perspective I don’t think you’ll ever see us get very excited to have this huge overweight in Japan because you’re swimming against the tide.”
The benchmark Nikkei 225 Index lost 21 percent in dollar terms over the past five years, almost three times the amount of the S&P 500, Bloomberg data show. This year, the Nikkei is up 6.8 percent, while yen has lost almost 6 percent.
The best-performing stocks in the Nikkei this year are Tokyo-based Oki Electric Industry Co. (6703), up 87 percent in U.S. dollar terms, and Advantest Corp. (6857), up 55 percent.
“If you want to buy one, get in line, even for the big ones, because it’s been depressed for so long,” Nairn said in his Georgian meeting room. “I also think the rest of the world has very little knowledge of Japan now.”
To contact the reporter on this story: Rodney Jefferson at r.jefferson@bloomberg.net
To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net
http://www.bloomberg.com/news/2012-04-25/edinburgh-money-man-showing-world-japan-companies-best-bargains.html
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