5 min read 7 Nov 22
As stewards of capital, we help companies becoming better versions of themselves. We call this value-added ‘shareholdership’.
We work hard to be considered the shareholder of choice. We want companies to want us on their share register; not simply because we bring patient long-term capital, but because they know that we add value to their businesses.
There are various ways we try to do this. For example, we leverage M&G’s massive network of corporate relationships across the globe, offering up suggestions to investee companies for new client or supplier relationships, strategic or research partnerships and potential mergers and acquisitions (M&A). We engage with companies on environmental, social and governance (ESG) considerations, which can have a material impact on long-term investment outcomes. This ‘servant-leadership’ model, where we seek to use service as a way to exercise a leadership position in the companies we invest in, is how we try to add value and impact investment outcomes.
In a Japanese context, some companies have historically been reluctant to engage with foreign investors. This has now changed. Corporate Governance reforms in Japan witnessed in the last decade have dramatically changed the structure and mindset surrounding shareholder relationships. Not only do we have active and constructive dialogues with our Japanese portfolio companies today, they increasingly seek us out for advice and guidance.
Whilst institutional reform has clearly been helpful on this front, a critical aspect of successful and value-adding engagements, especially in Japan, is the choreography of our shareholder conduct. M&G’s Asia Pacific Equity team boasts a long history of senior corporate interactions in Japan, and has learned through years of thoughtful application how to orchestrate successful engagements. Indeed, we have dedicated and senior resources dedicated to precisely this task.
Being seen as a shareholder of choice requires a track record of adding value to companies. Our ability to do this is born out of our research process. We have worked hard in the past two-plus decades to put ourselves in a position to plausibly claim that we can price the risk of ownership for a given business in a superior fashion compared to the market. Rather than deploying financial models to generate superior earnings forecasts, we have developed so-called ‘mental models’ to focus on identifying, quantifying and qualifying risk. If you research companies rather than investment ideas, you ask different questions. If you ask different questions, you go to different places for the answers. You create a different ecosystem for discovery. This leads to differentiated, and we would argue, superior dialogues with companies which in turn, drives a better understanding of the risk of ownership. The perspective has also put us in a good position to serve the companies we track; to challenge and/or support their decision-making and to make value-adding introductions to other companies.
Overall, our engagements so far in Japan have been fruitful. We have many examples of having made useful introductions to companies such as Hitachi, Nikon and JSR to non-Japanese companies that they would not otherwise have connected with. We have, in a private setting, suggested operational changes to some portfolio holdings that have been acted upon and have subsequently driven value-creation. We have helped companies to improve their ESG credentials through a focus on improved sustainability and diversity policies. We regularly pitch M&A ideas to portfolio holdings, offering up supporting rationale and analyses.
In summary, we are active managers and we look to add value to the companies in which we invest. The superior perspective we have earned about the companies we invest in helps us to serve them with value-added support. The win-win here is that helping companies to create or release value is correlating positively with excess return generation for our investors. The opportunity-set for this value-added shareholdership approach in Japan today is significant. The combination of a corporate sector awash with latent value and changed attitudes to shareholder engagement creates a fantastic backdrop for our investment approach.
The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.