Japan, a market that has confounded investors for the last decade, is showing definite signs of a turnaround, says Charles Edwardes-Ker, manager of the $31.5-millionTD Japanese Growth.
"We are going through a cyclical recovery, but there is something else going on. This is a market that has not in the past emphasized profitability," says Edwardes-Ker, 43, a London-based portfolio manager with TD Asset Management Ltd. "But this is changing." It was not until 1995, for instance, that share buybacks were legalized in Japan. More recently, dividend taxes were lowered, which has the potential to change the way corporations regard their shareholders.
Edwardes-Ker adds that the unwinding of ownership links between companies, and more demanding foreign investors, combined with the "lost decade" of the 1990s, have put tremendous pressure on companies to engage in cost-cutting.
"There is secular change, albeit at a Japanese pace, which tends to be slower than in the West. But there is change," he says. "These elements are making me quite positive on the Japanese stock market."
Edwardes-Ker focuses on three areas: export leaders, domestic restructuring stories and special situations within the less-followed small and medium-capitalization sectors. A bottom-up stock picker, he has a watch list of 275 stocks that he screens according to valuation measures such as price-to-earnings and dividend yields. "We also pay a lot of attention to a factor that is increasingly important: management. It has more tools with which to reward shareholders than in the past," he says.
The core of the fund consists of about 50 large-cap names, while smaller and mid-cap firms comprise the remaining 15. Edwardes-Ker tends to be a buy-and-hold investor within the core holdings, which are usually each limited to about 2.5% of the portfolio.
However, he will go as high as 5% for some stocks that have very large index weightings. But the non-core portion of the fund tends to have riskier, less liquid names that are limited to 1.5% of assets. His portfolio turnover, which was 70.5% last year, has usually been moderate.
Small-cap valuations, he argues, are especially attractive. For instance, in 2002, he acquired Alfresa Co. (formerly Fukijin Co. Ltd.), a drug wholesaler, and Alps Logistics Co., which were growing at about 15%, and traded at about seven times earnings. Both are still in the portfolio; the former is now trading at about 15 times earnings, while the latter has a price-earnings multiple of about 13.
"There are large areas of the market that analysts seem to ignore, where valuations are really exciting," says Edwards-Ker. "We're very happy to put those names in, when we can find them."
Edwardes-Ker, who tries to visit Japan at least twice a year, has been a Japan specialist virtually his entire career. Born in Paris and schooled in England, he attended University of Bristol, where he graduated in 1984 with a bachelor of arts in politics and economics. His first job was a trainee position at a London brokerage firm, W. Greenwall & Co., where he eventually worked in Far Eastern institutional sales.
"I was given a choice of U.K. engineering, or doing Japan and Asia," he recalls. "I thought there was more of a future in the latter." In 1986, he shifted into fund management when he joined Sun Life Investment Management (no relation to Canada's Sun Life Financial Services). He worked on the Japanese desk and helped manage two funds, as well as Japanese stocks in several international equity funds.
In 1988, Edwardes-Ker was hired by Argosy, where he chose Japanese stocks for the U.K. merchant navy pension fund. Two years later, he moved to Commercial Union Morley, where he was the Far East fund manager in the segregated pension fund area. Between 1993 and 1996, he worked for Lloyds Bank Investment Management, where he was lead manager of its Japanese equity fund.
In 1996, he moved to a small British merchant bank, Singer and Friedlander, where he managed a Japanese fund that was marketed offshore. In October 2001, he joined TD Asset Management in London. After he took over its Japanese fund in December he began a thorough house cleaning.
Edwardes-Ker steered the fund through a difficult 2002 and continued to do well as market conditions improved in 2003. He remains hopeful that Japan's economic recovery is in place, as he points to a forecast of 2.6% GDP growth.
He also continues to favour such large caps as Nissan Motor Co., the No. 3 Japanese automaker that has experienced a turnaround thanks to cost cutting. "We're very keen to see management that does the right things and rewards shareholders," he says. "Historically, investors were slow to accept the Nissan turnaround story, but it's been one of the best examples in Japan."
