IJ spoke with Drew Edwards, CEO and Portfolio Manager of Usonian Investments, LLC during his visit to Tokyo in early December 2018. The Chicago-based asset manager, who specializes in value investment in Japanese stocks, was researching investment-worthy companies in a stagnant economy. He is optimistic about Japan’s future, based on his extensive experience with Japan.

Investment
Japan (IJ):

Can you outline your investment strategy?

Edwards:

We follow a fundamental, bottom-up and value-oriented investment strategy. We emphasize downside protection and prioritize protecting clients' capital. We seek companies with strong corporate assets, conservative levels of financial leverage and a demonstrated ability to make money over market cycles. On top of that, we spend a lot of time trying to understand governance dynamics and management motivation. We want to see how management can better utilize company assets that are not generating optimal economic return. We have about 45 company stocks in our portfolio.

IJ:

You studied at Sophia University in Tokyo when you were young and early in your career you joined an activist fund investing in Japanese companies. You have been a value investor in Japanese stocks since 2011. Why have you been interested in Japan?

Edwards:

I was a teenager living in the U.S. in the 1980's. At that time, I was fascinated about Japan as an "economic miracle." Corporate Japan had unique business practices that seemingly contributed to competitive advantages and Japan's rapid economic growth. I also was intrigued by the emotional reaction by American media and political leaders in reaction to Japanese corporate acquisitions of prominent American assets, such as Rockefeller Center and Pebble Beach Golf Links. I remember thinking of "What are these guys upset about? The prior owner sold the asset at a big profit, and in any case, it isn't as if the new Japanese owner can drag Rockefeller Center and Pebble Beach Golf Links back to Japan never to be seen again." I was curious about what I thought to be xenophobic nervousness in the U.S. and decided to move to Japan to learn more about it. It is interesting to see how history repeats itself – I sense a similar xenophobic atmosphere in the U.S. and Japan today vis-à-vis economic growth in China.

Also in the 1980's, I was intrigued by the shareholders' rights movement and financial innovation happening in the U.S., which are also similar to what we are seeing in Japan today. I was particularly interested in initiatives by T. Boone Pickens, who faced negative media coverage at that time, but proved to positively impact inefficiently managed companies through his shareholder rights initiatives. By coincidence, during the year I moved to Japan, Mr. Pickens led a high-profile activist attempt on Koito Manufacturing that played out differently in Japan than the U.S. I found the Koito-Pickens dynamics interesting and have continued to study the topic of shareholder rights in Japan since then. [Editor's note: Pickens had waged a bitter but unsuccessful battle to get on the board of Koito. He sold his 26.4% stake in April 1991 and by July 6 had dropped his two-year lawsuit seeking a seat on the board.]

IJ:

You're in Japan now looking for companies to invest in. That ought to be difficult, given Japan's very slow economic growth.

Edwards:

To the contrary, we continue to find many attractive investment opportunities in Japan. Perhaps that is because of the value-oriented lens through which we view investing. We are focused on opportunities to grow the per share value of our investment, which is not the same thing as looking for markets with demographic or GDP growth.

Despite slow GDP growth and negative demographics, Japan offers many attractive investment opportunities, particularly when thinking about per share growth. There are many companies with strong operations and attractive business models that have an ability to compound per share value irrespective of GDP growth. In fact, negative demographics and economic growth can create an environment ripe for strong returns for the right business model. For example, there is a very efficient grocery store operator in northern Japan that is pursuing a compelling consolidation strategy that is successful partially because of negative demographics in their market as they are consolidating the growing number of competitors that lack successors or otherwise are incapable of competing with this company's low-cost operating model.

Other companies with mature businesses and limited opportunity to grow revenue have significant opportunity to grow per share value through share buybacks for example.

IJ:

Would you share with us your view about Japan's future, where people feel like we're stuck in a permanent economic slump?

Edwards:

I definitely do not believe Japan is destined to remain stuck in a permanent economic slump. To the contrary, I am quite optimistic about Japan's economy.

First, I believe Japan is going through structural changes today similar to what we experienced in the U.S. in the 1970's and 80's. The U.S. in the 1970's suffered low economic growth. We had many overcapitalized conglomerates that were generating weak return on capital. The 1980's was a period of policy changes, financial innovations and shareholder rights movement. Much of the economic growth we have experienced in the U.S. from the 1980's through today is the result of those policy changes that pushed companies to make better use of capital and invest in growth. Similar types of changes are taking place in Japan today that I believe will spark economic growth.

Second, I sense a generational and cultural shift in Japan today similar to what we observed in the U.S. in the 1970's and 80's. That was a time in the U.S. when conservative Depression-era management was retiring and being succeeded by a younger, less conservative generation. In Japan today, I sense a growing population of talented entrepreneurs that are more comfortable taking risks to create innovative businesses. I believe these new entrepreneurial leaders will contribute to Japan's economic growth, especially as policy changes free up latent assets currently trapped on corporate balance sheets that are inefficiently managed, and facilitate reallocation of these assets to investment in innovative new Japanese companies. History and financial logic show that this is a winning formula for economic growth.

Japan is uniquely rich in human talent, intellectual capital and financial capital. As these resources are catalyzed through policy changes and generational shifts, as latent assets are invested in capable entrepreneurs and innovative companies, Japan's economy will benefit. From my perspective, this is a time of exciting opportunity for Japan.

IJ:

Thank you very much.

Drew Edwards
Drew Edwards

Drew Edwards is Founder and Chief Investment Officer of Usonian Investments LLC. He has 19 years of investment experience and has run the Japan Strategy since inception in 2011.
Prior to founding Usonian Investments, Drew was Managing Director, Portfolio Manager and Head of International Equities at Advisory Research, Inc (ARI). Prior to ARI, he was an investment professional at Taiyo Pacific Partners, an activist fund backed by CalPERS and Wilbur L. Ross & Co. that focuses on Japanese equities. Drew began his career as an investment banker at Lehman Brothers and as a finance executive in the health care industry.
Drew holds an M.B.A. and J.D. from Northwestern University and a B.A. in International Business from Sophia University (Tokyo).