[Fund-Analysis] The Top 10 Stocks Held By Japan's Biggest SMB Value Fund

Good investors copy, great investors steal

One of the world’s richest and greatest investors, Mohnish Pabrai, once said:

“We love original ideas. But truly, there are already plenty of good ones out there, ours for the taking. If I were too proud to copy the ideas of others, I likely wouldn't have even a fraction of my current success.”

With those words of wisdom as an inspiration, it seems foolish not to piggy-back for free on the greatest investment-minds in Japan!

I recently made a post about Japan’s biggest Value stock investing fund (you can find it here). That fund has some of the greatest companies in it, but if you want the chance to truly get a lot of return on your investment (with higher risk of course), the small and medium-sized businesses (SMBs) are where you should look.

So without further ado, I give you the rundown of Japan’s biggest SMB value fund:

East Spring Japan Small and Medium-sized Carefully Selected Value Stock Fund

I know it’s a mouthful, but the fund is definitely one to keep on your radar. Backed by one of Japan’s biggest banks, SMBC, it has over 3 billion Japanese yen under investment.

The fund’s description:

“We will mainly invest in small and medium-sized stocks in Japan, aiming to obtain medium- to long-term gains. Based on our unique value investment management philosophy, we will concentrate our investment on stocks whose stock prices are valued at a low price for corporate value.”

With a yearly management fee of 1.93%, it is on the high side, and as the fund only buys publicly listed stocks, you are free to replicate their strategy to the dot.

However, the fund managers have a relatively stellar performance record:

Since 2014, the East Spring Japan fund has outperformed the TOPIX by 23 percentage units, or 50%.

Top 10 Holdings of East Spring Japan SMB Value Fund:

Most interesting stocks in the fund

People who have been following Konichi-Value know I screen companies based on my tried and true Value Vetting Strategy. This strategy have the following parameters:

• A P/E less higher than 6 but lower than 25

• An average Earnings Growth higher than 7% over the past 7 years

• Return on Equity at at least 10%

• A dividend yield higher than 0.5%

• Net debt/Earnings Before interest, Taxes and Depreciation lower than 2

Three companies from the fund manages to qualify with these filters in place:

Sumitomo Heavy Industries [6302]

Sumitomo Heavy Industries, Ltd. (住友重機械工業株式会社, Sumitomo Jūkikai Kōgyō Kabushiki-gaisha) (SHI) is an integrated manufacturer of industrial machinery, automatic weaponry, ships, bridges and steel structure, equipment for environmental protection, including recycling, power transmission equipment, plastic molding machines, laser processing systems, particle accelerators, material handling systems, cancer diagnostic and treatment equipment and others.

This company is bordering to be considered large cap, but it still manages to hold the growth levels of a mid-sized business which makes it a very interesting investing candidate. I will definitely look more into this company in the future.

HAMAKYOREX [9037]

HAMAKYOREX CO., LTD. is a Japan-based company mainly engaged in third-party logistics (3PL) concentrated on the logistics center business, as well as freight truck transportation businesses. The Company operates through two business segments: The Distribution Center segment is engaged in center operation business and center delivery business. In addition, the Lorry Trucking segment is engaged in general cargo transportation and special stack cargo transportation business.

This company has ridden the shipping boom wave and made substantial profits over the years. As many companies do not want to engage themselves in shipping and delivery but still want to have an online-shop presence, HAMAKYOREX is fully equipped to take advantage of this. However, competition is fierce and rather than brand loyalty, this business is run by price and margins, which will make it a volatile business. The supply chain issues we’re facing now are also having a major impact on the company.

HAMAKYOREX is definitely still on my radar and I will try to analyze the company in depth soon.

Relia Inc [4807]

Relia Inc is a major telemarketing company engaged in contract operation, installation, and human resource development of call centers.

The company has had a sustained growth and managed to not only create a huge business around outsourcing call-centers for support and sales, but also recruitment and other human resource activities.

However, it has not been without a fair share of controversy. In 2020, one of Japan's biggest news outlets, Asahi Shimbun, showed that Relia Inc had manipulated sales contracts for their client TEPCO:

“According to a report on June 13 of the same year, it was reported that the fraudulent audio editing was led by the top management in the field, and that the person in charge concealed the telephone solicitation that deviated from the rules. While the number of contracts contracted by TEPCO has been sluggish, a so-called "recapture" department had made late-night phone calls and forceful solicitation of the elderly in order to achieve its sales goals”

Even though the figures of this company are interesting, I would be careful to invest in a company where the top management have shown to be untrustworthy. Hence, I will not analyze this company further…