After 27 Years of Ignoring ROE, a Japanese Investor Converts

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After almost three decades of investing in Japanese stocks without pushing companies for higher returns, Naoki Fujiwara says it’s finally time to change.

The Tokyo-based fund manager, who oversees about $6 billion for Shinkin Asset Management Co., now brings up return on equity whenever he meets executives. Failure to do so might lose his fund investors. While financial buzzwords come and go in Japan, Fujiwara says this one is no fad, and he’s planning to broach the topic with more executives this week as the nation’s shareholder meetings peak.

The pressure has never been greater for Japanese companies to use shareholders’ funds well, and for equity owners to make sure they do. Prime Minister Shinzo Abe put ROE at the heart of a list of policies for making businesses more profitable, including an equity index that picks stocks based on it, a stewardship code to get investors to press for better returns, and rules started this month for businesses themselves.

“There’s much more focus on capital policy,” Fujiwara said. “We have to be more proactive now.”

Fujiwara notes the country’s focus on reducing so-called cross-shareholdings. When he began investing at the height of Japan’s bubble economy in 1988, shares that companies excluding insurers held in one another accounted for almost 35 percent of the stock market, according to Nomura Holdings Inc. Now they make up about 11 percent.

In those early days, Fujiwara found company executives dismissive of ROE, calling it irrelevant. He started talking about just one part of the equation instead, and has focused on earnings for most of his career.

Holding Cash

“They’d ask me what was wrong with holding cash,” Fujiwara said. “Now management see that they won’t survive unless they heed our calls to boost ROE.”

Fujiwara isn’t alone in his conversion. Some 63 percent of investors say better dialogue with managers is needed to improve how companies are run, according to a survey by Nomura this year. That’s up from 42 percent last year.

“This is a clear effect of the introduction of the stewardship code,” Nomura strategists led by Hisao Matsuura wrote in a report dated March 25.

Even life insurers are taking their fiduciary responsibilities seriously, according to Tsuyoshi Maruki, chief executive officer of activist fund Strategic Capital Inc.

Nippon Life Insurance Co., which has about 9.1 trillion yen ($74.1 billion) in Japanese shares, said in April it will consider voting against annual-meeting proposals this month at companies whose ROE is lower than 5 percent. The insurer has started talking with companies about the policy, spokesman Shinichiro Kon said.

Small Changes

“I want to praise those institutional investors -- they’re changing, if just a little,” Maruki said. “If they follow through on the guidelines they created for shareholder votes, the scope for change is huge.”

Others are more skeptical. Nicholas Smith, Japan strategist at CLSA Ltd., says too many investors keep voting in the same management every year even after providing abysmal returns to shareholders.

“Do or do not -- there is no try,’ Smith said, quoting Yoda from the Star Wars movies. ‘‘I don’t want to hear them say they will consider voting against -- I want to see loser managers thrown out on their ears.”

Sharp Corp. shareholders approved the reappointment of Chief Executive Officer Kozo Takahashi after he faced calls to resign at the struggling television maker’s annual meeting Tuesday. The company has lost about $13 billion in the last four fiscal years, was on the brink of bankruptcy, and now is selling its headquarters and shrinking its solar business.

Investors, Companies

For the Life Insurance Association of Japan, it’s companies that have more work to do. A survey the group published in March shows 59 percent of executives said they view ROE as their most important management target. Some 93 percent of investors say it should be ROE, the survey showed.

ROE on the Topix index averaged 6 percent in the 10 years through 2013, compared with 12.6 percent for the MSCI World Index. It’s since risen to 8.2 percent, against a global average of 11.5 percent.

“Japan needed a very simple metric that we weren’t going to argue about, and ROE is something we can all get behind,” said CLSA’s Smith. “In Japan, you take forever to come to a decision, but once you’ve made it, then the whole place turns on a sixpence.”

The Fujiwara of today agrees.

“We’re in an era where companies have to answer on ROE,” he said. “And if we as asset managers don’t follow through with the stewardship code, our investors will abandon us.”

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