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Finding Long-Term Value in Japan

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar. We're out in San Francisco, visiting Matthews Asia Funds, and I'm here with Taizo Ishida. He is a manager on Matthews Japan Fund and Matthews Asia Pacific. He is here to tell us a little bit about stock picking in Japan and where he is seeing some opportunity. Taizo, thanks for joining me.

Taizo Ishida: Sure.

Stipp: The first question for you as a Japan stock-picker, this is an area of the world that a lot of folks have seen potentially as a value trap or there is lots of macroeconomic issues, long-term macroeconomic issues. When you are looking for opportunities investing in this region, what qualities do you look for in Japan businesses that you invest in, and do you have any recent examples of picks that exemplify your investment process in the region?

Ishida: If you do a Japan investment for long time, say, 1990s, 20 years, that's the time that Japan peaked in 1990. So you can't really look at the macro numbers to determine which investment strategy works on that. I think you have to ignore that. It's just really as simple as that.

In 1990s, I think the successful strategy for Japan investment is not so much for the Japanese companies doing business in Japan, it's more like to find who is doing well in the U.S., because U.S. was the engine of the growth in 1990s.

Now, if you look at last 10 years, it has shifted a little bit from U.S. to Asia. So, definitely market is moving from West to East. And really only recently I think Japanese companies they realized, I guess, this is not the way to look at it. Asia is a way to look at it. So, that's the realization of the companies. So I look for the companies who do well in Asia, not so much of the rest of the traditional Japanese companies' turf like U.S. and Europe.

Stipp: Would you say then among some of your picks that the export or the opportunities outside of Japan then are one of the drivers or is there an example of a company where you see this opportunity sort of playing out versus a company that maybe you didn't choose to invest in because you didn't see the growth opportunities?

Ishida: I would pick company called Pigeon. It's a small baby-care product company in Japan. Now, the company has been doing business for long time in Japan, but you know remember Japan doesn't produce many, many babies actually, million babies a year.

But if you look at China for example, 15 million babies a year. So the company actually shifted some of its strategy early 2000, somehow went well and now they are selling a lot of the baby care products in China, even today I think the company's revenue and profit – I think 20% of the revenue, 50% of the profit, is coming from Asia, and most of them from China, and they are now going to India, so there are more babies and prospect there is pretty good.

Stipp: On the valuation front, as you are looking for opportunities, what's the valuation look like compared to recent history? Are you finding that you have more opportunities to put money to work now or is it a little bit harder to find some attractive picks?

Ishida: Well, it is always hard to find a great company with a good valuation, so there is a challenge to it. I think what I do – I know those companies and just wait for their stocks to come down to where I see that their valuation is decent and growth is decent. That's sort of the approach I have.

So, it's always hard to find those companies, but you have 5,000 companies in Japan, and my portfolio in Japan, for example, only have 50 names. So it's not that much challenge. I mean it is a challenge, but it's not that difficult.

Stipp: When you do find an opportunity where the valuation does look reasonable, it's usually because the market has overreacted to something or there is some reason that the market isn't fully valuing a company's prospects.

When you're looking at some of the recent picks that you've had what do you think is behind the fact that you are maybe getting a better valuation at this time? What kinds of factors lead you to be able to get a good value when you are investing in your areas of investment?

Ishida: I guess one thing is different from what I do, actually Matthews does, and the other people is time horizon. If you look at what's going to happen next quarter, six months from now, maybe chances of making money is not that great. But if you look at three to five to 10 years ahead, if you think that this franchise value is going to really do well in say 10 years, that's when it makes a huge difference, the way you look at things.

So today maybe a little expensive, but if you think growth prospects are much higher say five to 10 years down the road, why not own the stock? And that's the approach, perhaps very hard to just, you know, have that kind of approach if you have short-term time horizon investment.

Stipp: Sort of that time horizon arbitrage that you can take advantage of if you have the luxury of holding on for a long time.

Ishida: Right. Exactly

Stipp: Taizo, thanks so much for joining us and for your insights today.

Ishida: Sure.

Stipp: For Morningstar, I'm Jason strip. Thanks for watching.