David Nadel Bullish on Japanese Small-Caps by Royce Funds
While the macroeconomic picture in Japan is unsettling for many investors, we are finding what we think are inexpensive high-quality businesses across many industries. Royce International Smaller-Companies Fund Portfolio Manager and Director of International Research David Nadel talks about how he is positioning his portfolio and explains why he has confidence in FamilyMart, a Japanese convenience store chain.
Francis Gannon: How are you thinking about Japan today and positioning it in the International Smaller-Companies Fund?
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David Nadel: We’re pretty bullish on Japan, actually, which is not a consensus view. It is the number one country weighting in the portfolio—about 16% of Royce International Smaller-Companies Fund is Japanese companies.
Japan was 50% of global market capitalization in 1989. It’s about 8% of global market capitalization now. There has been a rally for two years that’s kind of petered out in the last six months or so, and I think very few people really wanted to believe that rally. So we’re just finding a lot of very high-quality businesses. Return on invested capital is increasingly a priority of the better-managed businesses.
The reputation of Japan had always been that the companies were not managed for profits and that the minority shareholder was sort of just along for the ride, and often not really getting a great deal. And that’s changing.
I also think from a macroeconomic level the picture in Japan is much more encouraging than what you’ll typically see in the papers. They also have the world’s second-largest foreign currency reserves.
Francis: Let’s go a little bit more micro, though, in Japan—where you’re finding opportunities, and themes, and sectors, and how were you positioning that 16% of the overall portfolio in the Fund.
David Nadel: Japan is a market that has, for equity investors, a great deal of breadth and depth. So we have holdings across industries. We’ve tended to shy away from businesses that are purely dependent on the Japanese consumer and have been more attracted to companies that are a play on pan-Asian growth.
One of our largest holdings in the Royce International Smaller-Companies Fund is a company called FamilyMart. FamilyMart Co., Ltd. (TYO:8028) (OTCMKTS:FYRTY) runs convenience stores. They have a network of 17,000 convenience stores across Asia. About 60% of their store base is outside of Japan, but it’s only about 10% of their net income, so the future is the ex-Japan business. So that’s an example of something that is giving us consumer exposure, but again being a play on pan-Asian growth and using Japan as sort of the cash-cow funding mechanism for their expansion.