In March this year, Warren Buffett’s Berkshire Hathaway announced it would pay $1.8 billion to take a 2.49% stake in Tokio Marine, Japan’s leading insurance company. Richard Aston, portfolio manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund, shares his insights.
At a time when investors are weighing up their global asset allocation strategies in light of heightened geopolitical uncertainty and wild market swings, one of the world’s most respected long-term investors has once again committed capital to Japan’s market.
So, what factors may explain Buffet’s renewed interest?
Returns Driven by Governance Reform
Buffet’s bullishness around Japanese equities dates back to the start of the current decade, when Berkshire Hathaway first revealed stakes in five of the country’s major trading houses.
These initial stakes have been increased over time, and the aggregate investment has generated a return of over $24bn in just six years at current market values.
This latest investment in Tokio Marine is very different from these and highlights that the opportunities in Japan are not limited to a single sector. Considering Berkshire has now closed a yen-denominated bond sale of $1.7 billion, it’s third-largest yen bond deal ever, speculation that it plans to commit even further capital to the country is rife.
Tokio Marine is an interesting candidate due to its strong operational characteristics and represents a clear example of how the opportunities in Japan are evolving.
As a long-term shareholder, we believe that Tokio Marine, with its strong ROE and proactive capital allocation strategy, can serve as a useful example for how corporate governance reforms are supporting in delivering long-term investment opportunities across a broader range of high-quality Japanese businesses.
The question is no longer simply whether companies are governed properly, but whether they are using their balance sheets and capital more effectively to generate growth in an efficient manner alongside complementary returns to shareholders.
This year is already expected by some analysts to potentially set another record for Japanese companies in terms of earnings generated and dividends paid. Meanwhile ROE across the market continues to grow.
With a revision to the country’s Corporate Governance code, due later this year, likely to focus on unlocking more of the $840 billion cash pile that continues to be held by listed companies, we expect such metrics could continue trending higher from here.
Simply put, that is helping create a broader pool of high-quality investment opportunities.
Japan remains a market where many companies are financially strong, where balance sheets are often underleveraged by global standards, and where improving capital allocation is gradually being reflected in better shareholder returns. This is an attractive combination for investors.
It’s no surprise, then, that Berkshire Hathaway is not alone in taking a bullish stance.
This year has already seen other North American asset managers Brookfield and Blackstone commit billions of dollars to assets in Japan. The significant long-term opportunities being created by the end of deflation and improving corporate governance appear to remain intact, although geopolitical developments, including those in the Middle East, may influence market conditions.
A Long-Term Opportunity
Buffett and Berkshire Hathaway are consequently not making a short-term macro call on Japan. They are allocating capital to a high-quality business in a market where the long-term case efficient capital allocation continues to strengthen.
For those still underweight Japan or inclined to view selloffs as reasons to stay away, that should prompt some reflection. The pattern in recent years has often shown that periods of weakness give way to sharp recovery, justified by the ongoing improvements at the corporate level.
Richard Aston is portfolio manager of the CC Japan Income & Growth Trust and the Chikara Japan Income & Growth Fund
