Harris Associates’ CIO for international equities, David Herro, has said if he was handing out report cards for company management then Japan would get a 'big fat F'.
Speaking at a client event in London, Citywire A-rated Herro said Japan is a perfect example of the difference between low price and high quality.
‘There is plenty of low price in Japan, but it’s very difficult to find high-quality businesses. Quality is companies that earn good returns and are committed to using that free cash to generate more return and most companies in Japan aren’t doing that.
'That’s why Japan gets a big fat F, they sit on cash, they don’t care about returns, and the companies don’t work hard to build shareholder value.
'I used to think Japan was improving, well it is improving – it’s not getting worse. But it’s not improving anywhere near enough, it’s slow like a turtle.'
At present, Herro currently has 6.6% of the Harris Associates Global Equity fund allocated to Japan, and said many of the companies don’t take into account the need for shareholder satisfaction.
'The problem with a lot of Japanese companies is that they think the money is theirs and not ours.'
Herro only has one Japanese company in the top ten of the portfolio, which is Toyota Motor, where Herro currently has 4.6% of the fund.
'It’s a great company and the management has greatly improved. But when we look at Toyota we have to knock off half of the cash because they have around $60 billion in cash, $10-$15 billion of which they say they need for a rainy day.
'Okay, we understand, but what’s the rest of it for? They have gotten better and increased payout and we need far more of that behaviour – it just needs to be more infectious, it needs to spread.’
Herro described Japan as a ‘protected economy’ and said many officials within Japan know this needs to change in order for the countries businesses to succeed.
‘When was the last time a foreign company made a hostile takeover on a Japanese company, it’s a real simple answer – never, because they are protected.
‘We actually had a meeting with one of Shinzo Abe’s officials and he said that there are problems. I told him to quit protecting these companies and make them compete; that’s how you get better.
'If you’re a Premier League football team you are not going to get better playing against League One, so make them compete,' he said.
Over the three years to the end of August 2017, the Harris Associates Global Equity fund returned 10.10% in US dollar terms. This compares with a 19.89% rise by its Citywire-assigned benchmark, the FTSE All-World TR USD, over the same time period.