Japanese small cap value ?

An offshoot of the thread “The Boy Who Cried Wolf”:

The addendum of https://www.gmo.com/americas/research-library/let-the-wild-r… mentions Japanese small cap value stocks as one actionable strategy to escape the carnage and still make money.

Any ideas for practical investment vehicles?
Looking at DFJ, I wondered if dividend is a good enough proxy for value.
EWJV - value factors, but not small cap.

Thoughts?

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Looking at DFJ, I wondered if dividend is a good enough proxy for value.

I’m not a big fan of dividends, but this has some merits.

There are two categories of “problem” company that could be helped this way.–
Those that don’t believe in any capital allocation other than letting cash stack up on the balance sheet forever,
and those that are run for the benefit of insiders and are not at all interested in the shareholders.

Requiring a solid dividend tends to get you statistically a bit away from the worst of both.

But I would do what Mr Buffett did:
Buy a slate of individual firms directly.
I like the FT.com global equities screener.
Or, of course, buy the ones Mr Buffett bought by buying Berkshire shares : )

Jim

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The addendum of https://www.gmo.com/americas/research-library/let-the-wild-r…… mentions Japanese small cap value stocks as one actionable strategy to escape the carnage and still make money.

Any ideas for practical investment vehicles?
Looking at DFJ, I wondered if dividend is a good enough proxy for value.
EWJV - value factors, but not small cap.

You’re on the same wavelength that I am. I’m bullish on Japan, because it has the world’s lowest valuations. As an added bonus, the Big Mac Index shows the Japanese yen to be substantially undervalued against the US dollar.

I own shares in DFJ (WisdomTree Japan SmallCap Dividend Fund). In my opinion, it’s better than EWJV (iShares MSCI Japan Value ETF). Here are my reasons:

  • DFJ is better diversified with respect to individual stocks. Its biggest position is just 0.87% of the portfolio, compared to 10.59% for EWJV.
  • According to Morningstar, DFJ has a lower price/book ratio than EWJV. The former is at just 68% of book value while the latter is at 80%. This is quite a feat given that DFJ isn’t an official value fund. I prefer a more broad-based fund, because “value” funds are biased towards the industries that normally have lower multiples anyway. So if a fund has cheap stocks that are NOT in the usual low multiple industries, then you know that it’s picking from a cheap market.
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I’m bullish on Japan, because it has the world’s lowest valuations. As an added bonus, the Big Mac Index shows the Japanese yen to be substantially undervalued against the US dollar.

I own shares in DFJ (WisdomTree Japan SmallCap Dividend Fund)

This looks kind of interesting to me. I am a believer in small cap value, generally outperforming in the long run, at least in the US stock market. I know the Japanese economy has been sluggish for a long time though, and they have demographic issues, so that’s a negative. Nice diversification and an okay dividend (2.2% per Yahoo Finance), it’s just a question if you can expect any decent growth from it?

Jim, the S&P Japan Small Cap Value is at about -1% for the last 12 months. I had a look at the price charts for the five trading companies bought by Mr. Buffet. Those have appreciated significantly in that period (three at ~45%). Probably still a good buy, but not as cheap.

The space of Japanese small cap value might be too small for Berkshire to invest in. I was hoping to find a way to do that, and suspect I do not have the bandwidth to manage a value portfolio, so hope to find a rebalancing ETF, or even an actively managed fund. GMO and LSV manage such strategies, but for institutional size investors.

BenSolar: Here is GMO’s take: https://www.gmo.com/americas/research-library/japan-value_an…

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My thinking about Japanese small cap value is that it’s probably a great place to look if you HAVE to be long equities because of an institutional mandate. (like GMO)
Especially if you have a diversification mandate.
I’m not in either of those situations.

The relative case is good.
But generally I don’t find Japanese valuations particularly compelling in an absolute sense, especially given the
historical tendency for earnings not to arrive in the pockets of outside investors with high efficiency.
Not many individual Japanese stocks meet my usual international value criteria.
Topix CAPE is about the same range it has been for the last ~14 years, so it’s not obviously a once-in-a-generation opportunity.
And, though it’s not great reasoning to avoid Japanese stocks, it’s just plain depressing to watch
the Topix slide relative to the S&P pretty much steadily, year after year after year since 1996, except for a brief bounce 2002-2005.
Japan: where capital goes to die. Usually, at least.

Are the valuations better than what’s typical in the US, even factoring in the generally lower quality of goods? Sure.
But is that, by itself, a good enough reason to jump on board?

I liked Japan a lot better 12 years ago when it was in my view much cheaper.
https://discussion.fool.com/bad-reasoning-on-japan-28318212.aspx…
Nikkei 225 index was at 10123, now at 27078. (that’s 8.6%/year before dividends in yen if you’re wondering)

Jim

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Speaking of Japan, I completed the 20th anniversary Honolulu marathon in ‘92 during my internship and it was sponsored by Japan Airlines with nearly a third of the 20K entrants from Japan. Vacationed in the Spring of ‘93 and splurged to pay $250 for my only round at Pebble Beach which was owned by a Japanese outfit. My oh my, how times have changed over 3 decades.

I recall WEB being asked at an ASM in the ‘90s about Japan and he seemed to have quite limited interest. Our investment in the 5 trading Japanese companies and issuing cheap debt seem quite wise, with more to come I’d imagine.