Masaki Gotoh, Misaki Capital
Misaki Capital is one of the bright new fund manager stars in Japan. HFC’s Stefan Nilsson decided to catch up with Masaki Gotoh, who is a partner and chief investment officer at Misaki Capital in Tokyo.
Masaki is a Partner and Chief Investment Officer/Portfolio Manager of Misaki Capital Inc. Prior to co-founding Misaki, he was Portfolio Manager of the Asuka Value Up Fund, responsible for managing the Fund and the investment team. Prior to this, he worked at SPC Japan (Standard Pacific Capital LLC’s Japan Advisory) jointly responsible for long-short investments in Japan, Korea and Taiwan, as well as Morgan Stanley Japan in International Proprietary Trading and Goldman Sachs Japan heading Asia-Pacific Derivatives and Trading Research and brings 15+ years of experience in Finance. Masaki received his B.Eng in Computer Science from Cornell University and MBA from Northwestern University.
Tell us the story about how this experienced team set up on its own.
The genesis of Misaki started over 15 years ago when Yasunori Nakagami, our CEO, was a partner of a domestic management consulting firm. He found that successful engagement via value-enhancing projects with management led to an increase in the value of the business and thus its stock price. Hence, rather than charging high consulting fees to only those large companies that could afford it, he decided that it would be more mutually beneficial to invest in businesses and management teams that he likes, provide the same services for free and generate the returns from the market as the market realized this value. This led to the launch of the previous fund in 2005, and, after having built and managed the strategy for over eight years, the senior members of that team spun out to form Misaki Capital in late 2013.
You manage a sort of a friendly activist or engagement strategy. How would you describe your investment strategy?
We prefer to use the word “constructive” vs “friendly” to describe our strategy. “Friendly” implies constant support of the business regardless of the strategies undertaken by senior management. We consider ourselves “constructive” as our sourcing is based on strong business models that have H-O-P – hungry, open and public – management teams who are willing to listen to minority shareholders. When we consider an investment in a business, we think to ourselves “what would we do if we were to inherit this company in its entirety today?” The answer to this question tends to lead to value enhancement through long term growth of cash flows rather than excessively focusing on efficient balance sheet use. We believe management teams appreciate this mentality and become more open to our proposals. While balance sheet efficiency is critical, the solution tends to be one-off projects whereas cash flow expansion requires constant improvement (kaizen) and leads to long term growth of the business and a healthy long-term relationship with management. Therefore, we believe that having both investment – financial – professionals and management – consulting – professionals is crucial to our investment strategy. We take seriously our three Misaki values, Value for Investors, Value for Businesses, and Value for Society. What this means, of course, is that our engagement should add value for the businesses but, of course, must add value to our investors. As such, there have been and will be times when we must be less “friendly”. However, that is not the preferred tool and would be used as a last measure to uphold our fiduciary duty to the fund’s investors which, ultimately, should be value enhancing for the business as well. Ultimately, whatever the methodology undertaken to persuade management, we do so for business value enhancement. We have simply found that collaborative, constructive dialogue is generally more productive.
What’s different about your strategy compared to other fund managers out there?
The Japan “activist” universe is still very small and growing and, thus, allows for many varieties of activism. Our peers have their own biases on with whom and how they invest. As we are a pure long-only strategy with no hedging overlay, we very much consider ourselves a value investor and base our valuations on the margin of safety vs intrinsic value and the potential engagement upside, or the “double discount”. We look for companies that have a sustainable competitive advantage, focusing on the moat of Buffett-speak, in order to assess the sustainability of the cash flow generation and to compute, in greater confidence, this intrinsic value. But equally important is whether management is “engage-able”, i.e. we will not simply wait for the gap to shrink. Engagement is inherently a very human, high-touch, high-context strategy. As such, local, cultural connectivity is crucial to successful engagement. The fact that our entire team is Japanese, physically based in Japan leads to positive interaction with our companies. Finally, the content of engagement is a very customised, management consulting based approach in addition to the financial toolbox that traditional activists focus on.
We’ve now seen about 3.5 years of the Abe administration and Abenomics. How has the economy and investment landscape changed?
Although it might seem from outside of Japan that the pace of change occurring in Japan is slow, being on the ground and having been doing this strategy well before the Abenomics tailwind, we can definitely feel the landscape progress, much faster than it ever has in my investing career. The multiplying effect of the JPX-Nikkei 400 Index, the corporate governance code, the stewardship code, implementation of external board directors, and other factors have all had an enormous impact to wake up corporate Japan. This snowball effect has made it much easier to engage with companies compared to pre-Abenomics and have allowed us to build a portfolio very quickly with active engagement with a majority of our companies, both in and out of the present portfolio. We are still in the very early stages of corporate governance reform. It took the UK 20 years for the investment landscape to fully embrace the stewardship code. Large, structural shifts take time and it is unrealistic, if not outright naïve, to think that such massive shifts can happen in a year or two. The government has kickstarted the movement. It is now up to corporate Japan to embrace and we hope that we may be assisting that change in some small way.
Is your investment strategy sustainable in the long term or is it a theme you run for a few years during a period of change in the economy?
Regardless of Abenomics, our strategy was and would be the same if the environment were different. We only invest in 10-15 companies and, at any given time, we believe there are enough good businesses with strong, open management teams that are valued at a discount. This was true before and continues now. The universe has simply expanded. We don’t invest based on a top down theme, and are bottom up driven from this selection criteria. Furthermore, unlike the private equity market, which our strategy is often compared with, the universe of potential investments is very large and valuations have fallen through the decades to rational levels. Finally, there is no “completion” to business management enhancement, and particularly so in Japan where the starting point is so far behind the “managerial skill” curve. Contribution to this enhancement from shareholders is even more new compared to Western markets.
Foreign investors are less bullish on Japan than many domestic investors are. Do you think this is because of better access to information, home bias or something else?
With regards to corporate governance change, I would argue that there is scepticism on both sides. But I have noticed that long-time foreign Japan-watchers have most noticed the change. Those less bullish have, in my view, yet to notice the subtle changes that are occurring in Japan. Domestic investors, on the other hand, are no more bullish with regards to corporate governance and continue to focus on the short term. Again, I would note that we are not talking months or quarters but years. Long-term investors will be able to capture the most upside, domestic or foreign, and we believe the opportunity set is tremendous.
If you hadn’t been a fund manager, what would you have been doing?
I would probably be running my own business. After starting as an engineer in a large Japanese firm, I moved to finance, focused on derivatives, given my quantitative background. I then moved to proprietary trading based on a quantitative model, then fundamental long-short investing and now in what is almost a private equity approach to public markets. My career has become less quantitative and more qualitative over time, understanding businesses better and focused less on the minutia of the numbers. As such, running a company like one of our portfolio companies would be the ultimate transition. In that sense, I not only am fulfilling my dream by co-managing a venture called Misaki Capital, but also have the luxury to assist many other great businesses in the process.