Nikko Asset Management Japan Active Value strategy

Investment Philosophy

The Japan Active Value Equity Strategy employs a fundamental, bottom up approach with a value style bias. The strategy invests in Japanese listed companies across all sectors and market capitalizations. The strategy’s investment philosophy is based on the belief that higher returns can be achieved by identifying undervalued companies with the potential to drastically turn their current situation around. Research is focused on companies that are likely to exhibit a recovery in earnings, sustainable growth, or undergo a drastic change in financial policy in the future. These companies are likely to witness substantial changes in return on equity (ROE).

Focus on catalysts

The strategy places emphasis on the identification of catalysts. When investing in undervalued stocks, the investment team avoids falling into value traps by looking for companies with catalysts that could move their stock higher.

Capturing opportunities in the mid to small-cap segment

While the strategy is all-cap, the portfolio managers have an additional focus to capture opportunities in the mid to small cap segment overlooked by the market. The Japanese equity market has a wealth of opportunities in this space, as demonstrated in the fact that a significant proportion of TOPIX companies have no sell-side analyst coverage. Many stocks in Japan remain cheap because they are under-researched and not enough information is available for investors.

Key Characteristics

Focus on the rate of change of ROE

Illustrated below is an example of a turnaround situation in which a conservative company with large cash holdings and low ROE is transformed into a high ROE company.

Nikko AM Japan Active Value - Impact of Management Strategies

Corporate analysis and stock selection

Broadly speaking, the investment team seeks mispriced stocks from two different perspectives: structural and cyclical. Through this process, they seek stocks that are mispriced due to excessive pessimism, misconception or simply being neglected by the market.

Investment Process

Defining the Research Universe

  • From 3,500 listed stocks, eliminate those with high credit risk, perceptible corporate governance risk and low liquidity
  • Top 1,000 stocks by market cap covered by Sector Analysts
  • Portfolio Manager conducts research based on own ideas

Narrowing the Investment Universe

  • Stocks rated by Sector Analysts
  • Portfolio Manager’s own investment ideas

Combining Valuation and Fundamental Analysis

  • Companies shifting to a more aggressive management strategy
  • Companies shifting towards a more positive stance on shareholder returns
  • Companies likely to become acquisition targets

Construction of “Best Ideas” Portfolio

  • Best investment ideas selected while controlling the balance of the overall portfolio risk characteristics

Fundamental and Valuation Analysis Review

  • Continuous Research, Portfolio Review and Risk Management