Tags: Japan | Takeda | investing | small-cap

'Japanese Buffett' Dumps Country's Small-Caps in Return Hunt

Monday, 15 Sep 2014 11:35 AM

Wahei Takeda, the Japanese cookie tycoon who became one of the nation’s best-known individual investors, is selling most of his holdings to focus on companies seeking to deliver the best return on equity.

Takeda, 81, said he’s reduced his portfolio to 20 companies, from more than 100 three years ago, and plans to keep selling until he has six or seven that pay high dividends and are increasing ROE, a measure of profit relative to shareholder capital. A stock investor since 1956, Takeda said he is buying shares in the biggest trading houses. The largest of those, Mitsubishi Corp., Mitsui & Co. and Itochu Corp., generate average ROE of 12.4 percent, beating the Topix index’s 8.2 percent, data compiled by Bloomberg show.

“Businesses that care about returns are going to rise,” Takeda, said in an Aug. 26 interview from Takeda Confectionery Co.’s headquarters in Nagoya, just under two hours by bullet train from Tokyo. “It’s fine if it takes 10 years. The good picks are those with low ROE now and a plan to boost it.”

Takeda, known locally as the nation’s Warren Buffett for seeking out undervalued equities over six decades, is buying shareholder-friendly stocks just as the government pushes companies to prioritize making profits over hoarding money. Return on equity, a measure of how managers use cash, is improving in Japan this year after languishing at half the global average for the prior decade.

“There are no stock investors in Japan who wouldn’t know Takeda, he’s one of the most famous individual investors and he’s been in the market a long time,” Seiichiro Iwamoto, who helps oversee the equivalent of $37 billion at Mizuho Asset Management Co. in Tokyo, said by phone. Takeda’s new strategy is “in tune with the times,” he said. “Japan is becoming more focused on ROE. It’s going to be a major theme.”

Strategy Scrutiny

Company strategies are under scrutiny as Prime Minister Shinzo Abe spurs inflation that penalizes firms holding excess cash. Takeda, who also owns a gold museum and a confectionery- themed amusement park, said he noticed executives changing their attitudes without ever hearing about the government’s efforts to achieve the same end.

Japanese companies with equity returns of more than 10 percent in their most recent filing have rallied an average 17 percent this year, compared with a 8.6 percent gain for the rest, data compiled by Bloomberg show.

“I knew about ROE, but if you cared about it in the past, you couldn’t invest,” said Takeda from a lobby looking out on his museum’s Zen garden. He’s dressed in black kimono-like traditional workwear with a gold badge showing one of the seven Japanese gods of fortune. “Capital efficiency just wasn’t talked about. Now investors care.”

Investing Career

Takeda has been buying stocks since 1956, a year after heading to the northern island of Hokkaido with a plan to set up a branch of his parents’ confectionery business. A stockbroker friend encouraged him to plow money he made selling pineapple- cream cookies into equities.

Fifty years later, Takeda had top 10 stakes at more than 100 companies valued at 30 billion yen, making him Japan’s No. 1 individual investor, the Nikkei newspaper reported in 2006. He declined to say how much his stocks are worth now.

Filings compiled by Bloomberg show companies have disclosed holdings by Takeda since Dec. 31 that have a value of about $30 million. Nine of the 22 firms reported the investor had reduced his stake from the previous filing, the data show. Japanese companies give details on their 10 biggest shareholders in annual reports.

Same Strategy

For most of his career, Takeda chose shares that looked undervalued, searching for candidates in the Japan Company Handbook, a quarterly publication with earnings forecasts and other data. He sought to become a major shareholder in smaller companies, saying this allowed him to have a hand in various businesses without taking on the risk of starting them himself.

Three years ago, Takeda changed tack, sensing that larger companies were becoming more intent on keeping shareholders happy and betting the trend would continue. His new picks include three big Japanese trading houses, he said, declining to name them.

The Topix Wholesale Trade Index, with Mitsubishi Corp. and Mitsui & Co. as its largest constituents, is producing return on equity of 10.3 percent, Bloomberg-compiled data show. ROE averaged 1 percent for the 1990s and early 2000s.

Mitsubishi, the largest trading company, surged 23 percent since announcing its biggest buyback in seven years in May. Mitsui, the No. 2, said in February it would repurchase about 50 billion yen in shares and pledged in May to raise its dividend payout ratio to the highest in six years. The Tokyo-based company offers a forecast dividend yield of 3.7 percent.

High Yields

“Japanese major trading houses care about ROE,” Takeda said. “They are globally strong and dividend yields are good. I think investing in stocks is about investing for yields.”

Planners in Abe’s government, working to revive Japan’s economy through measures dubbed Abenomics, have been seeking to make companies more attractive to investors with Takeda’s priorities. The JPX-Nikkei Index 400, which picks businesses with the best operating income and ROE, started trading this year. The nation has also adopted a stewardship code to enlist institutional investors to press firms to boost returns.

Atsuto Sawakami, chairman of a $2.8 billion mutual fund that bears his name and co-author of a book with Takeda about investment, says his Nagoya-based counterpart’s success comes from single-mindedness and a long-term perspective.

Single-Minded Investor

“He isn’t swayed this way and that by the market,” Sawakami said by phone on Aug. 27. “He buys and buys when stocks are cheap and then just leaves them.”

Takeda said his most profitable investment was Fujifilm Holdings Corp., a camera maker he purchased in 1970 for 2,000 yen and kept buying as the shares dropped to 1,700 yen. He ended up selling his stake for 5,000 yen. The worst was Mitsubishi Heavy Industries Ltd., offloaded for about 250 yen after Takeda paid 700 yen for them in 1990, he said.

Big hasn’t been better since Takeda made his investment shift. The Topix Core 30 Index, which tracks the nation’s largest companies, has climbed 76 percent the past three years, compared with a 134 percent surge for the TSE Mothers Index of smaller stocks. Nor have trading companies. Mitsubishi has gained 29 percent, with Mitsui up 37 percent.

Takeda’s not worried, saying he’s willing to wait years.

“I’m an optimist,” he said, more than two hours into the interview. “And I stress to others the importance of thinking things through.”

© Copyright 2017 Bloomberg News. All rights reserved.

   
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InvestingAnalysis
Wahei Takeda, the Japanese cookie tycoon who became one of the nation's best-known individual investors, is selling most of his holdings to focus on companies seeking to deliver the best return on equity.
Japan, Takeda, investing, small-cap
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2014-35-15
Monday, 15 Sep 2014 11:35 AM
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