Annual Evaluation of Commitments to the Japan Stewardship Code
Kaname Capital LP is a private partnership whose sole business is investment management. Our primary duty is to deliver superior investment performance and advice to our clients.
Our strategy focuses on the intersection of “quality” and “value” in the Japanese public equity market. We believe that extra-normal returns can be achieved by identifying companies that trade on low cashflow-derived valuations despite possessing high-return assets. These opportunities are rare, of course, and we use a propriety quantitative process that distils the equity market into a small pool potential investments. On average, about 2% of the 3,300 listed companies in Japan satisfy our criteria at any given time. We then conduct intensive fundamental research to arrive at our final portfolio.
Our single stock research focuses on ensuring that our quantitative process has correctly identified “quality” and “value”, understanding a company’s fundamental drivers, and assessing management’s ability and willingness to share economic returns with minority interest shareholders. Our portfolio intends to have fewer than 30 stocks with holding periods measured in years. We do not “trade” stocks, but instead try to act like an “owner.” Our engagement process is expressed in all facets of our ownership regimen including, but not limited to: frequent meeting with corporate representatives, sharing our financial modeling with management to ensure we agree on the levers of value creation, and actively voting our shares.
We believe the alignment of company management’s goals with those of its shareholders and other stakeholders is essential to protecting and enhancing our clients’ investments as minority interest owners. We therefore support the Japan Stewardship Code as it encourages communication and transparency between corporations, investment managers, and their clients. This document outlines our approach to each of the core principles presented by the Japan Stewardship Code.
Principle 1: Institutional Investors should have a clear policy on how they fulfill their stewardship responsibilities, and publicly disclose it.
The investment professionals of Kaname Capital are committed value investors. To us, value investing is the act of identifying a gap between the market valuation of the assets that make up a corporation (fixed assets, human capital, intangible assets) and what the market is currently willing to pay for them. Our process is to find stocks that are underappreciated by the market and engage with company management to understand and define the source of the discount. We then develop an action plan, ideally in full collaboration with management, to eliminate the discount in a way that mutually benefits both stakeholders and shareholders. Given our willingness to hold positions for several years, we vote proxies in a manner that encourages and rewards actions that generate economic returns above a company’s cost of capital. We believe that if our portfolio companies can generate returns above their cost of capital, their valuations should rise materially, and that this would be to the benefit of all – management, employees, and our clients.
Principle 2: Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and publicly disclose it.
Kaname Capital is an independent company owned by its founders, with investment management as its only business. We are fiduciaries and take that responsibility very seriously. We do not anticipate any conflicts of interest, as our fiduciary duty takes precedent over any other concerns.
We strive to offer our clients thoughtful, honest advice under all circumstances, regardless of the potential impact to our firm’s profitability. Our structure as a private partnership allows us to take a long-term view towards our investments and our business.
Kaname Capital’s policy is to disclose, minimize, and eliminate all identified conflicts of interest in the best interest of our clients. In the event that a conflict of interest arises between clients, our policy is to seek to resolve such conflict as fairly as possible in relation to all parties.
Principle 3: Institutional Investors should monitor investee companies so that they can appropriately fulfill their stewardship responsibilities with an orientation towards the sustainable growth of the companies.
First, Kaname Capital would like to clarify the term “sustainable growth” contained in Principle 3. As partial owners in the residual value of a firm, we are primarily focused upon the sustainable return on capital above a company’s cost of capital. What we value is an increase in the spread between these two. Our notion of “growth” is focused upon increasing rates of economic return and can result from incrementally higher returns on capital expenditure, cost cutting, or lowering the cost of capital through balance sheet optimization. Growth - defined as revenue growth - is not valuable in and of itself. We can think of many companies that “grow” by overpaying for M&A targets, increasing top lines sales by accumulating low return assets, or aggressively representing accounting earnings for example. To be clear, this type of “growth” is in direct conflict with the goal of “fostering corporate value.”
With “sustainable growth” repositioned, Kaname Capital uses a combination of top‐down and bottom‐up investment approaches that blend traditional fundamental insights with innovative quantitative methods to identify undervalued securities. Our valuation‐based process relies on several key factors, including a long‐term investment horizon, conviction, and a commitment to deep fundamental research. Our research emphasizes not only identifying pricing anomalies, but also understanding the long‐term drivers of return in the markets and the companies in which we invest. A critical underpinning of our approach is the careful and continuous review of information collected about current, and potential, investee companies. Whether we collect information about companies indirectly, through corporate filings and other data collected through third‐parties, or directly through meetings with company management, we look for and evaluate information which may provide insight into an investee company’s ability to generate positive, sustainable long‐term returns for its shareholders. Factors such as consistent profit warnings, equity dilution, significant merger and acquisition activity, failure to meet regulatory requirements, or rapid changes in balance sheet or income statement items may all assist in our assessment of a company. We collect and incorporate new information on a company throughout the year, as it becomes available.
Principle 4: Institutional Investors should seek to arrive at an understanding in common with investee companies and work to solve problems through constructive engagement with investee companies.
Our primary method of engagement is through meetings with investee company management teams, and at times, adding our voice as a member of, or signatory to, groups that share our views regarding best practices in corporate governance. With regard to proxy voting, we welcome outreach from management teams that wish to provide more background on, or to clarify, information on any particular proxy item prior to a general shareholder meeting.
When Kaname Capital choses to engage directly with company management, or participate in stakeholder dialogues, such engagement is guided by our commitment to the importance of constructive, collaborative discussions as the best way to enhance shareholder value.
Principle 5: Institutional Investors should have a clear policy on voting and disclosure of voting activity. The policy on voting should not be comprised only of a mechanical checklist; it should be designed to contribute to the sustainable growth of investee companies.
Again, we clarify the working definition of “sustainable growth” to mean the maintenance, or increase in, the spread between the return on capital employed and the cost of capital of the firm. With this goal underpinning our role as fiduciaries, we believe that proxies are assets of our clients and must be voted with diligence, care, and loyalty. We seek to vote proxies in a way that maximizes the value of clients’ assets. However, Kaname Capital will abide by any specific proxy voting instructions conveyed by a client with respect to that client’s securities. The CCO coordinates Kaname Capital’s proxy voting activities.
Although we may consider third party proxy voting recommendations, we remain ultimately responsible for all proxy voting decisions and may vote against such recommendations if we believe it is in the interest of our clients. As a general rule, we will vote in favor of those actions which we believe improve the long‐term sustainable growth of the company, as we define it above.
Principle 6: Institutional Investors in principle should report periodically on how they fulfill their stewardship responsibilities, including their voting responsibilities, to their clients and beneficiaries.
As highlighted in our discussion of Principle 5, Kaname Capital understands that proxy voting is an integral aspect of security ownership. We archive digital correspondence in our voting process and update our clients on proxy events of relevant concern to them.
Principle 7: To contribute positively to the sustainable growth of investee companies, institutional investors should have in‐depth knowledge of the investee companies and their business environment and skills and resources needed to appropriately engage with the companies and make proper judgements in fulfilling their stewardship activities.
We gently repeat that our primary concern is the “sustainable growth” in an investee company’s ability to generate economic returns above its cost of capital.
We fully agree that it is the responsibility of institutional investors, who are requesting management’s valuable time for engagement, to be well-prepared for such interactions so that conversation is efficient and purposeful. While management teams should be responsive to their shareholders’ requests for information, their primary role is to profitably manage a company’s assets to the benefit of owners and other stakeholders. Indeed they are fiduciaries too.
We always strive to do our homework before opening any dialog with a potential investee company. Prior to any dialogue, we study information including, but not limited to, a company’s public filings, its competitors’ public filings, and independent research on a company or industry from myriad sources, including information on corporate governance and best practices for sustainable investing. We continually look to incorporate new information into our analyses as it becomes available. We intend to be open and honest in sharing our views with management, clients, and the wider investment community regarding valuation levels and market drivers. We also look to amplify our voice by joining, or supporting, groups who share our views on best governance practices.
Updated October 2019