Q&A with Makiko Hakozaki, Director, Senior Portfolio Manager, Japanese equities

As we celebrate the 25th anniversary of the Russell Investments Japan Equity Fund, we speak to Makiko Hakozaki, Director, Senior Portfolio Manager, Japanese equities, to find out more about the fund and the changes she has seen in the Japanese economy over the past two decades. Makiko joined Russell Investments in 1998 as an associate director, moving into the manager research team in 2007. 

In this Q&A, we discuss the extraordinary success of the fund’s 25-year track record, dive into the secrets behind the achievements of the fund and find out why Japanese equities are becoming increasingly attractive to international investors.  

 

After five years as a research analyst supporting the Russell Investments Japan Equity Fund, you became portfolio manager in 2012. How important is effective collaboration between research and portfolio management in driving investment success?

The collaboration of the two is fundamental, creating a healthy blend of challenge and partnership between the PM and analyst. This collaborative approach enables a more dynamic framework and results in a more in-depth analysis into the suitability of a manager for the fund.  

Your tenure as portfolio manager and research analyst on the Japan team is part of an extraordinary 25-year track record which we are celebrating this month. What has the Russell Investments team done well over the years to continually generate such great performance?

One of the key factors to the success of the Russell Investments Japan Equity Fund has to be the multi-strategy and multi-manager investment approach. What differentiates the fund from its peers is that the portfolio is put together with a blend of diversified managers with varied styles to dynamically manage exposure. We have a consistent process that allows flexibilities to deal with market changes. This flexibility has proven to be invaluable during the recent downturn in the market as a result of the coronavirus pandemic, enabling us to recover losses in the portfolio during this period of heightened volatility.

The Russell Investments Japan Equity Fund is currently managed by all females. Is this unusual in Japan?

Across the globe, female portfolio managers in general remain the minority. In Japan, it is extremely unusual to have an all-female managed fund, which is something we are tremendously proud of.

I believe that our strong and dynamic team is one of the key strengths behind the consistent success of the fund over the last 25 years, with many individuals playing a role in generating the track record. Currently, the core team in the Japan Equity Fund consists of myself, Yuki Xi—who is the associate portfolio manager—and Kaori Tsujino, lead research analyst. Yuki provides well thought-out strategic beliefs and efficiently exploits tactical opportunities, playing an active role in portfolio strategy implementation and capital market research. Kaori has played a major role in providing the extensive research behind finding the best-in-class managers. In addition to the current core team in Japan, Symon Parish, senior director, head of multi-asset, APAC, Hiro Yoshida, senior consultant and Kathrine Husvaeg, director, senior portfolio manager, emerging market equities are three longstanding members of the team who have managed this portfolio previously and remain at Russell Investments in other roles today.

Since joining the Japan Equity Fund team, what are some of the biggest challenges you and the team have faced?

A challenge which immediately comes to mind is what is being called as the ‘Japan passing’ era, after the global financial crisis (GFC), which was a very dark and challenging period. Witnessing Japan falling out of scope with investors resulted in limited trading activities taking place. This gave question to the rationality of the stock market’s pricing mechanism.  

Furthermore, over the years we have seen an increase in global managers shifting Asian headquarters out of Tokyo, resulting in fewer Japan specialist managers in the market. I recall being asked numerous times why I remained as a Japan specialist at the time. That said, investment opportunities were significant, and you could effortlessly find net cash companies with a positive cashflow growth trading below book. The belief that ‘stocks are too cheap’ was one of the incremental reasons I retained my passion as a Japan specialist.  

How has the fund return/risk profile changed over the last two decades?

Excluding the periods of shocks such as the GFC, it did not change significantly. However, we are successfully keeping good risk/return profiles in a more stable manner after the start of the Abenomics period (the economic policies advocated by Shinzō Abe since the December 2012 general election). In order to assist in evaluating the risk/return profile, Russell Investments introduced a proprietary CVS (cycle, value, sentiment) model, which supports portfolio managers’ tactical positioning shifts. This enables a more coherent structure to understand the balance of risk / return. 

 

What has been the biggest change that you have seen in the Japan financial market over this time and what advantages do you think Japanese companies have over other markets?

From time to time, Japan is referred to as ‘the most successful socialist country.’ However, keeping the socialist-country-like culture while following the capitalism practice inevitably cause stresses or contradictions. It might be fair to say low productivity and unique cultural practices were a result of this contradictory structure. For example, not cutting unprofitable business to keep jobs for workers made total sense culture-wise, if it was a decade ago. We have been seeing a steady shift in Japan moving into a more typically capitalist-thinking society. Corporate governance improvement is a clear trend, making the Japan financial market more attractive. In recent years, this trend is clear and bold, as Japan has gone through decades of growth in order to change governance behavior. 

Why do you believe global investors should consider investing in Japan today?

In recent years, Japan has moved to a more capitalist model of corporate governance, imposing new governance regulations to legitimize companies and help the country move more in line with global peers. While the talk for change in Japan has been going on for many years, it is only recently that we have proof of this change. 

Japan’s Prime Minister Shinzo Abe had a vision for the new ‘Corporate Japan’ and has encouraged the government’s Financial Services Agency (FSA) and regulatory bodies to toughen up. This has been modeled after the existing UK Stewardship Code. Japan’s Stewardship (JS) Code was established by the FSA in 2014, which was followed by the introduction of the Corporate Governance (CG) Code. The CG Code is designed to elevate the broad governance culture among Japanese companies and encourage them to target sustainable growth in corporate and shareholder value. As a result of these codes, it has become very difficult for companies to maintain their sloppy governance practices. Indeed, we have started to see market dynamics shift in response to these codes, further evidenced by the fact that the number of foreign investors in Japan has significantly grown in recent years.

If you had a crystal ball, what would the Japanese investment landscape look like in 10 years?

In 10 years’ time, my view is that there will be an increased number of mergers among Japanese companies. In Japan, there are a larger number of small companies and they have been able to survive thus far because of government orders for the banks to be generous to them. However, going forward this is not going to be the case. 
 
Furthermore, due to the short-term headwinds caused by coronavirus, companies have to be more serious about what kind of attractive long-term plan they can present to their shareholders. This will result in more mergers and aggressive acquisitions and companies needing to take on a more serious stance.
 
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