Nikko AM Japan Cash-Rich Company Equity

Investment philosophy

The Japan Cash-Rich Company Equity Strategy primarily invests in “cash-rich” companies, or firms which have a high level of liquid reserves. There is a particular focus on whether such reserves can be used effectively towards growth and the enhancement of shareholder returns. The strategy also emphasises 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.

The strategy doesn’t limit its investments in terms of market cap segments or sectors, but instead looks at all Japanese domiciled companies that are likely to see earnings recovery or growth, or for which we have high expectations of a change in their capital management policy.

Capturing opportunities in the small-cap segment

The strategy has a small-cap bias. 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. The strategy leverages on the robust proprietary bottom-up research capabilities of the Nikko AM equity investment platform, as well as the portfolio manager’s extensive knowledge and experience in the mid- and small-cap space.

Key Characteristics

Japan Cash-Rich Company Equity 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 higher ROE company.

Impact of Management Strategies

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.

The focus of the research is in identifying high quality companies that are competitive and have the ability to generate cash flow. The following are examples of key attributes that the investment team looks for:

Portfolio characteristics

  • Approximately 50 stocks
  • High dividend
  • High quality bias e.g. high ROE, low leverage
  • Low valuation bias e.g. low PER
  • No bias towards low growth or utility stocks (despite common perception that high dividend portfolios have large exposure to such names)
  • Low beta and volatility

Investment Process

Japan Cash-Rich Company Equity Investment Process

Screening all listed stocks to identify undervalued ‘cash rich’ companies

Stocks with high credit risk, perceptible corporate governance risk*, or low liquidity are excluded from all listed stocks (approx. 3,700)

Screening for companies

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

Qualitative analysis by sector analysts who share the same philosophy

Strategy-specific analysis by portfolio manager

*Stocks that Nikko AM has determined to eliminate from the investment universe due to perceptible corporate governance concerns.
**Includes dividends and share buybacks
The diagram above represents a conceptual image of the investment process, the use of which does not guarantee future investment performance.