The cliched image of a fund manager paints them pouring over a company’s financial books before making an investment but Comgest’s Richard Kaye spends almost as much time with his nose in human resources records.
Metrics such as price/earnings ratios (P/E), return on equity and dividend cover are well-known methods of determining a company’s worth. However, Kaye – who runs the ¥171bn Comgest Growth Japan fund with Chantana Ward and Makoto Egami – also uses a different set of measures when analysing potential holdings.
“My approach to running a Japan fund is a humanistic approach, in a sense. I'm interested in what makes people within companies tick. Of course, we do the numbers and I can regale you with financial metrics and clichés like the best of them,” he explained.
Performance of fund vs sector and index since Dec 2017
Source: FE Analytics
“But my real interest is in what makes people tick and that comes out of the personal experience that I've had with Japan over the past 20 years or so since university.”
Kaye has managed the Comgest Growth Japan strategy for the past 10 years, although it was only made available to UK investors at the end of 2017. Since then, it has made a 1.80 per cent total return, which is the second highest in the IA Japan sector.
While all fund managers will of course assess more than just financial metrics when looking at companies, Kaye puts a heavier emphasis than most on understanding the culture in place at a firm.
He believes this is especially important when it comes to Japan, where a series of geographical, historic and cultural factors have combined to result in a unique corporate environment.
“I think that the real driver of Japanese companies – or any company, really – is the people that founded them and the people that run them now,” the Comgest Growth Japan manager said.
“We look at specific companies, which after all are just groupings of people, you can find a relationship between management and workers, a sense of corporate culture, a sense of shared motivation and purpose in Japanese companies which you don't necessarily find in other countries.”
Sector exposure of Comgest Growth Japan
Source: Comgest
Like many asset management houses, Comgest has an environmental, social & governance (ESG) framework that monitors companies on issues such as board inclusion, gender representation and worker attrition.
But Kaye said he is always struck by how “redundant” these questions are when it comes to Japanese businesses as many of them are already doing most of the things needed to get that tick in the ESG box.
“We invest in 30 or so companies … that tap into those particular corporatist instincts that I think Japan has very successfully cultivated, which allow for very efficient, very integrated and well-motivated business models,” he added.
“Japan, with the history that it's been through, has been able to cultivate a system of human relations which means you have organisations that are very well motivated and well-focused on a particular on a particular core process. They have good management/labour relations. They have good and coherent corporate cultures.”
How does this ‘humanistic approach’ approach work in practice? Kaye said there are two elements to how he analyses the culture of a potential investment.
The first is a top-down numerical approach, whereby companies are directly asked about their track records in areas such as worker attrition, employee disputes, average wage appreciation and health & safety issues.
“That allows us to create some kind of numerical screening for a sense of corporate community, the success with which workers and management pursue the same goal in the interests of all parties.”
The second element of this approach is “slightly more random” and involves meeting with the companies, their competitors and clients to form a subjective impression of their corporate culture.
“We spend most of our time actually meeting with management, trying to get a sense of the human nature behind the companies that we are looking to invest in,” he said.
An example of a Comgest Growth Japan holding that has ticked all these boxes is ZOZO, which is Japan’s largest apparel website. It specialises in bespoke clothes, sized to the individual customer.
“How does that company manage its internal relationships to keep up employee satisfaction?” Kaye asked. “One thing they do have is a completely flat salary structure.
“The CEO – Yusaku Maezawa – doesn’t want to allocate profits to ‘buckets’ within the firm. He believes that if one bit of the firm is doing better, then the people in it have a responsibility to help the people who have been worse. It's basically a very egalitarian approach to salary.
“He wants salary rises to be uniform across the firm for the same reason. He seems very anxious to instil a corporate instinct among his employees. He wants all employees to be focused on a single purpose.”