Nikko Asset Management Japan Fundamental Value strategy

Investment Philosophy

We believe superior performance can be achieved by making long term investments in stocks that are underperforming due to structural issues, but possess a turn-around catalyst. Through fundamental, bottom-up stock selection, the investment team looks for changes that act as catalysts for improving the utilisation of assets, capital efficiency and increasing future earnings, which will lead to a revaluation of the stock price.

Our core belief is that outperformance can be achieved by investing in undervalued companies, possessing the potential for positive revaluation. These companies are characterised by having products, services and/or technologies that would benefit from newly created demand caused by social or structural changes.

Contrarian Value-Oriented Investment Approach

Japanese stock markets are underpinned by the country’s mature economic foundation. It is highly cyclical and tends to exhibit repeating patterns. This is why we believe consistent and thorough application of a contrarian value-oriented investment approach is more effective in delivering stable excess returns than a momentum-driven approach.

Experienced Team with Long Track Record

Shigeru Aoyagi is the Team Leader and a portfolio manager on the Value Strategy Fund Management Team. He started his career with Nikko Securities in April 1986, then joined Nikko International Capital Management (now Nikko Asset Management) in March 1995. He has specialized in managing the Japan Value Equity strategy for institutional investors since February 1997 and was appointed the Team Leader in April 2010.

The Value Strategy Fund Management Team has extensive experience in Japanese equities and includes three portfolio managers and three value analysts. The Value Team is also supported by Nikko AM’s robust equity research platform, consisting of a team of experienced analysts and which has strength across all sectors, market caps and styles.

Key Characteristics

Focus on Turn-Around Catalysts

We seek to understand whether poor stock performance is due to a structural or cyclical issue, and invest in companies that we believe are underperforming due to structural issues, but possess a turn-around catalyst — what we call "Phase 1" stocks which are the focus of this strategy, and comprise around 60 – 70% of the portfolio*.

“Phase 2” stocks are those where structural issues have been resolved and the companies have begun to see positive cash flow.

Phase 1 Stocks:

Stocks underperforming due to structural issues, but have a turn-around catalyst

Focus on the catalyst to turn stock price around

  1. Structural change due to the company’s own efforts (supply side catalyst)
  2. Structural / environmental change in the market (demand side catalyst)

Does the company have products / services / human resources that are needed by the market to capture new demand?

Phase 2 Stocks:

Stocks underperforming due to cyclical issues

Assessment of type of cycle and position within cycle

  1. Cyclical factor due to economic cycle
  2. Cyclical factor due to product life cycle
  3. Cyclical factor due to time lag between upfront investment and recovery
  4. Cyclical factor due to business cycles unique to the company

* Weightings of Phase 1 and Phase 2 stocks are subject to change, depending on market conditions.

Investment Process

Investment Universe

  • All listed stocks, approx. 3,500
  • Excludes high credit risk, low liquidity, governance risk
  • Reduce to 2,000

Value Research Universe

  • Exclude overvalued stocks
  • Secondary check on liquidity
  • Reduce to 600 - 700 stocks

Bottom-Up Research and Fundamental Analysis

  • Analysis of stock performance
  • Research supply and demand perspectives
  • Company visits

Portfolio Construction

  • Final screening
  • 80 - 100 stocks
  • 3 - 5 year investment horizon

Risk Management

  • Disciplined selling criteria
  • Sophisticated risk management through dual model daily evaluation