Embracing change: Singapore fund Four Seasons targets alpha catalysts in Japanese equities
Profound shifts in board governance, demographics and technology are transforming the way Japanese companies do business, and Singapore-based fund manager Four Seasons Asia Investment is capitalising on this theme with its change-based investment approach which seeks out catalysts in neglected stocks across small-to-mid-cap equities.
Established in 2006, Four Seasons Asia Investment runs both long/short and long-only equity funds, trading less-crowded Japanese stocks in range of industries and sectors using elements taken from fundamental, event driven, special situations and catalyst investing. Both strategies look to generate call option-type payoffs while curbing downside risk and avoiding correlation with its peers and broader Japanese equity benchmarks.
The firm is led by CEO Shigeka Koda and managing director Kahori Ando, a Japanese husband-and-wife team who also serve as the firm’s co-CIOs. Today, Four Seasons has around USD650 million in assets under management.
Four Seasons’ Alpha Max Japan UCITS fund (Lux), its long-only strategy, and the long/short Four Seasons Trust Fund Spring (Cayman) each share the same basic structure and bottom-up, catalyst-based investment approach, CEO Koda explains.
“Change is the source of our return, the source of our alpha,” he tells Hedgeweek.
For long positions in both strategies, the firm looks to unearth small-to-mid cap companies which are usually overlooked or neglected by analysts. From there, Koda, Ando and their team delve deeper into a company’s upside potential, using this concept of change-as-a-catalyst to inform its stock selection and position-building process.
Expanding further, Koda is keen to underline that the portfolio is diversified by the investment horizon of those changes – not business sector or industry.
In practical terms, longs are categorised as either short-term opportunistic trades, typically thematic in nature, lasting around 12 months; medium-term bets of around 24 months, usually based around earnings or other company-specific developments; or strategic positions - which have no defined time limit, and are more event-based, usually involved turnarounds, management buyouts or consolidations.
“Our universe is not really fixed,” Koda explains of FSAI’s stock selection. “We always look for less crowded stocks for longs, while the shorts universe is always crowded names. We try to stay away from the earnings game, and we try to capture change as a source of returns. That’s why we call ourselves Four Seasons.”
For shorts, the firm searches for crowded and expensive stocks. Lately, this has meant exploring companies which have been short-term beneficiaries from the Covid-19 pandemic. He says that roughly half the short portfolio is made up of such firms, with hygiene and sanitation, drugstores, supermarkets and e-book distributors proving particularly fertile hunting grounds for bearish bets.
“Thanks to Covid-19, those companies’ earnings jumped up earlier - but it will be more and more difficult for them to deliver year-on-year growth,” Koda observes of the shorting approach.
An additional element based around the concept of ‘scarcity’ is also embedded in Four Seasons’ process, which Koda says helps further gauge a company’s upside potential.
“We select the stock based on concept of scarcity; this idea that supply is limited and demand for a company’s product is growing,” he adds. “For us, scarcity is a reflection of the entry barrier or competitive edge of a company or a company’s business.”
A 24/7 operation
2020 proved a tricky year in terms of company change, thanks to the upheaval on firms' business models as a result of the Covid-19 pandemic, and both of Four Seasons’ strategies ended the year in negative territory. However, the firm has rebounded into positive territory recently: the long/short strategy was up around 3.3 per cent in the first quarter of 2021, while the long-only strategy has advanced around 3 per cent year-to-date.
“When the market goes up and then goes down, we still manage to generate alpha,” Koda says of his funds’ performance.
Today, roughly 90 per cent of the firm’s USD650 million asset base come from long-only investors. These are made up of “top tier clients”, as Koda puts it, spanning public pension funds, corporate pensions in the automobile and electronics sectors, and a handful of well-known UK financial institutions.
Observing the firm’s unique set-up as a Singapore-based fund trading Japanese markets, Koda says it is important to maintain a degree of distance from the “noise of the market”.
A veteran of Japanese equities investing, Koda was at Goldman Sachs Asset Management before he launched Four Seasons, latterly as a senior portfolio manager investing in Japanese stocks, having earlier focused on a mix of large and small cap names and global technology between 1997 and 2006. Earlier, he spent five years trading fixed income within Goldman’s investment banking business.
His wife Ando was previously a Japanese equity senior portfolio manager at Sparx Asset Management, a publicly-listed Japanese equities fund manager between 1994 and 2006. Before that, she was a mid-small cap equity research analyst at BZW Securities Japan.
In a nod to their marital status, Koda describes the business as a truly “24-hour, seven days a week” investment operation. The pair’s long-term perspective and fundamental approach to Japanese markets has helped Four Seasons carve out a unique investment approach over the course of 16 years.
He explains how, after years of stagnation, Japanese companies are now undergoing sweeping changes, driven by transformations in management structure and shareholder composition, evolution in technology, and widespread demographics shifts in the country.
Such fundamental realignments underpin the wealth of change-as-a-catalyst opportunities targeted by Four Seasons.
Specifically, Koda points to the ways in which ESG factors and a more strident and vocal shareholder class are shaking up company governance; Japan’s ageing population and the effect on labour and business productivity; the “once-in-a-hundred-years” change within the automobile sector driven by electric vehicles; and the US-China tech war which looms large over industries such as semiconductors.
“Japan as a country was very under-invested for a long time by global investors, mainly because there were no changes,” he says. “Now there are very interesting changes happening. We see the country as being full of dry powder.”