Legg Mason’s Shiozumi: Three key lessons I’ve learned from 45 years of investing in Japan

Japanese equities have been one of the most volatile markets to invest in over the last two decades, with periods of feast and famine, but Legg Mason subsidiary Shiozumi Asset Management has identified some key rules for investing in the country which have stood the test of time.
Hideo Shizoumi, manager of the Legg Mason IF Japan Equity fund, which celebrated its 20 year anniversary on 22^nd October, has spent 45 years investing in the region in total, developing his growth-focused investment approach to a market which has undergone a significant shift from an export dominated economy to one increasingly focused on domestic consumption.
Shiozumi’s approach has rewarded investors, with the Legg Mason IF Japan Equity fund the number one in the sector since inception, having returned 440.37% to investors, versus the TOPIX return of 50.23%^[1] since inception.
Shiozumi said his investment style was based around three key tenets which he has honed over his career.
“The three most important lessons that I have learnt during my career as a portfolio manager investing in Japan are to be focused on growth companies, have a high-conviction portfolio which is far more concentrated than competitors and the index, and to hold stocks for the truly long-term,” he said.
Below, Hideo explains the finer points of his investment strategy.

1. Focus on growth, not value

“We are growth focused, looking for real opportunities to make money in the long term, unlike many managers which continue to plough the same stocks in areas that will be in secular decline (such as large-cap manufacturing exporters).
“The key to our process has always been to invest in companies across the market cap spectrum that have compelling earnings growth because of their positions as market leaders, and their ability to deliver profitability.
“In the first decade of the fund’s life, with the Japanese economy showing no growth at all and going through a major transition from an export-focused economy, growth companies were very difficult to find.
“However, in the last decade growth stocks have started to emerge as the economy has become more and more service-oriented, while the internet as a sales channel has created many new businesses. In addition the government has started to encourage its true growth champions in healthcare, long term medical care and robotics as it tackles the effects of an ageing society – noting that services created here could be the standard bearer for services provided world-wide”

2. Run a high conviction, concentrated fund

“The fund has always been concentrated, with between 30-60 stocks, and it currently has 39 positions selected using a bottom-up stock selection process.
“The top ten stocks account for more than half of the fund currently, and it looks nothing like the index. Many managers own a large number of stocks, diversifying away risk, but at the same time they are diversifying away returns.
“High conviction investing means accepting an additional degree of risk in the pursuit of higher returns, and the fund has a bias towards mid and small-caps which have strong niches, as this is where the potential for share price expansion is greatest.”

3. Be (really) patient

 “We want to own our stocks for many years, and build positions in these companies over time – benefitting from the effect of compounding returns.
“Having invested in Japanese equity markets for so many years, we know that investors have to expect to see changes during individual market cycles, and resist the temptation to change portfolios too often.
“We therefore avoid turning over the portfolio regularly in an attempt to try to chase the next big theme or keep up with the market. We have owned many companies in our Fund for more than 5 years, some for more than 10. Investing is, in our view, all about patience, and turnover on our portfolio is just historically less than 30% per annum“
[1] According to Legg Mason’s own figures, on an NAV to NAV basis, as at 30 September 2016. During this period there have been periods of loss due to the high volatility of this fund.