Long-term investors in Japan will smile at the commentary below. A generation of investors have been worn down by many false starts and promises.
Today, however, we are starting to see a real transformation in Japan. This may illicit wry smiles, as 'old timers' think of the long and distinguished broker lists that have been decimated as investors shunned the idea that change was ever possible.
Mainstream investors are looking elsewhere. But therein lies the opportunity.
The long-term case for taking an active approach to investing in Japanese equities rests on four tenets: a 30-year bear market has severely impacted investor psychology; there is no culture of equity ownership; market dispersion is at historical extremes; and the market has seen significant compositional change (with half of the companies listing since 1990).
Furthermore, the outright logic of investing in Japanese equities is supported by historically low valuations and balance sheet strength with significant levels of cash and assets underpinning market valuations, as well as continued improvement in corporate governance.
The uncooperative nature of Japanese corporates, who are resistant to change and have tended not to look after shareholders, are often cited as arguments for avoiding Japanese equities.
Investing is hard, regardless of where you are undertaking it. But this does not preclude equity investors from making money.
With ESG such a focus, a concern of this nature deflects investors from accessing a pool of serious high-quality businesses.
However, there are numerous examples we can point to where 'old school' Japan is disintegrating. Not everywhere, I grant you, but it is happening, with a generational change in corporate leadership and increasing foreign management.
The expression 'Japanification' is currently spreading around the world as investors fear the historical zombie-like state of markets occurring in other developed markets.
This may, or may not, be the case, and index investors in Japan over the past 20 years have had little to be thankful for.
However, it has been shown that a fundamental active approach can make money.
Investors need to separate generalisations from specifics and be prepared to embark on their own investment journey.
Charles Brooks is an investment specialist at Platinum Asset Management
• Generational change is occurring
• Overlooked transformation presents opportunities
• This is another false dawn
• It is Japan