A woman looks at an electronic stock indicator of a securities firm in Tokyo April 15.Shizuo Kambayashi/The Associated Press
More than one in eight dollars of Dan Chamby's $100-billion (U.S.) is already in Japanese shares, and the BlackRock Inc. money manager says he's looking to add more.
The Asian nation's equities make up 14 per cent of holdings across the funds that Mr. Chamby helps oversee, versus a benchmark of 4.5 per cent, he said in a phone interview last week from Princeton, N.J.. Even with the Topix index trading near a seven-year high, valuations are still low and Japan has the best earnings prospects of major markets, according to Mr. Chamby.
The 55-year-old money manager owns shares in about 130 Japanese companies, such as construction stocks with large cash piles, and is looking to buy if stocks fall. He's part of a growing crowd of Japan bulls, with everyone from Goldman Sachs Group Inc. to JPMorgan Asset Management Inc. favouring the nation's shares on bets that Prime Minister Shinzo Abe's push for better corporate governance will lead to higher profits.
"Japan is far and away the most attractive market," said Mr. Chamby, whose firm oversees about $4.7-trillion as the world's biggest asset manager. "Japan is confronting an existential crisis and it's a powerful stimulant for change," he says. "The threat of being overrun by China" has created a sense of urgency.
Since Mr. Abe came to power in 2012, Japan has introduced policies to make companies use capital better and improve profits. They range from a government-backed stock index that picks businesses with high profitability to stewardship rules to enlist institutional investors to press companies to boost returns. In June, the nation starts a complementary code for companies.
Governance, Yen
"The most interesting changes in Japan, and the most meaningful, are what's happening at the corporate-governance level," said Mr. Chamby. The stock market is weaning itself off a reliance on a weaker yen, and gains will instead be propelled by the change in approach to how companies are run, according to Mr. Chamby, who's stopped hedging some of the currency risk on his Japan investments.
About $55-billion of the money Mr. Chamby helps oversee is in BlackRock Global Allocation Fund Inc., which invests in equities and bonds, according to data compiled by Bloomberg. He shares those duties with Dennis Stattman and Aldo Roldan, the data show. The rest of the money is in 10 other products including the $1-billion BGF Global Dynamic Equity Fund and the $699.7 million MassMutual Select BlackRock Global Allocation Fund, according to Mr. Chamby and data compiled by Bloomberg.
ROE Increases
Return on equity for companies on the Topix stood at 8.3 per cent at the end of December, compared with 5.7 per cent two years earlier, according to data compiled by Bloomberg. The Japanese benchmark measure still trails the Standard & Poor's 500 Index, which had ROE of 14.4 per cent at the end of 2014.
Mr. Chamby's funds hold construction companies including Daito Trust Construction Co. and Okumura Corp., Bloomberg data show. He says he likes smaller builders that tend to have more cash than their market value.
Mr. Chamby is no stranger to Japan, having worked in Tokyo as a research analyst for Fujitsu Ltd. from 1989 to 1992. His wife is Japanese and he says he speaks the language regularly at home.
The Asian nation "provides the best combination of macro policies with valuations and earnings," he said. "If there were a meaningful correction, all else equal, we would probably be adding further."
Despite a 90-per-cent gain in the Topix from when Mr. Abe came to power through Tuesday, the measure traded at 15.5 times estimated earnings, compared with 17.8 for the S&P 500 and 17.2 for the Stoxx Europe 600 Index. While analysts expect profits at S&P 500 companies to rise 7.4 per cent in the next 12 months, they see an 18-per-cent gain for those in the Topix.
Valuations, Earnings
The large allocation to Japan means Mr. Chamby's funds are overweight in almost every industry, he said. He also favours trading houses, railway companies with property in prime locations and carmakers. He declined to name specific stocks.
Mr. Chamby says he's reducing holdings of drugmakers because their shares have risen too far. His BlackRock Global Allocation Fund holds stakes in Otsuka Holdings Co. and Sawai Pharmaceutical Co., data compiled by Bloomberg show.
The Global Allocation Fund, which started in 1989, returned 4.4 per cent over the year ended March, according to BlackRock, compared with 3.5 per cent for its benchmark. Over 10 years, the fund delivered 7.4 per cent annually, against 6.3 per cent for the benchmark, the data show.
Aside from corporate governance, Mr. Chamby sees reason for optimism in Mr. Abe's other so-called third-arrow measures, including in areas such as agriculture. He disagrees with other investors who have become skeptical about the pace of change.
"The third arrow is coming in, it's coming in slowly," Mr. Chamby said. It takes time to bear fruit, he said. "We'll have to be patient."