Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Michael Lindsell, manager, Lindsell Train Japanese Equity Fund.
One of Lindsell Train’s founding principles is to “run client money as we would run our own” – which, for us, means to protect and, if possible, grow the real value of your money. We think
we have the best chance of achieving this if we invest only in those companies that we judge to be “exceptional”. For us, the definition of “exceptional” is: “likely to be profitably in business in 20 years’ time”.
It is surprising how few quoted companies meet this test of durability, as evidenced by the high attrition rate for constituents of equity indices over the past 20 years. Because there are only a limited number of such exceptional companies in Japan (and globally) that meet our criteria, we necessarily run concentrated portfolios, with 20-30 holdings, and we rarely make changes to our portfolio. Here are three we favour.
Nintendo (Tokyo: 7974) is the world’s largest video-game company by revenue. Nintendo’s unique offering is its integrated hardware/software model – the company specialises in developing software for its own platforms (the 3DS and WiiU). All its software is proprietary and is developed around popular characters such as Mario, Donkey Kong and Pokémon.
In the past 30 years, Nintendo has sold more than four billion games. But the advent of the smartphone has diminished the popularity of dedicated gaming devices – Nintendo has been left behind and unable to cash in on its most popular franchises. In response, Nintendo announced a joint venture with DeNA, a specialist in mobile gaming, to showcase Nintendo games on smartphones and tablets. We believe this is a smart move – it will increase the value of Nintendo’s games while sticking with the integrated model we favour.
Shiseido (Tokyo: 4911) is one of the oldest cosmetics firms in the world, founded in 1872. We like cosmetics as a business – raw materials are cheap, yet end products are highly branded, aspirational items. The Shiseido brand is recognised worldwide and the company is dominant in Japan; it also has an important foothold in China. We had been monitoring Shiseido for many years before we bought it for our portfolios in 2012 at what we considered a reasonable entry price, helped by negative sentiment on the stock following the boycott of Japanese products by the Chinese over their claim to the Japanese-controlled Senkaku Islands in the South China Sea.
We are encouraged that the company is now undergoing a radical restructuring to address its deep-rooted problems and last year it appointed a new CEO with a marketing background and years of experience at Coca-Cola Japan. Before the restructuring the company had 128 brands; it’s now looking to cull these to the 15 core global brands accounting for 90% of sales.
Another cosmetics company, Mandom (Tokyo: 4917), specialises in selling hair-care products and cosmetics for men: Japanese men are big consumers of such products. Mandom is more than 85 years old and remains a family business – a feature we like, as family controlled businesses tend to be more conservative and invest for the long term. Mandom’s main brand is Gatsby, which accounts for 50% of sales, with a growing presence in Indonesia, where the company derives 25% of its sales. The weakness of the rupiah, disappointing Indonesian consumption and a fire in an aerosol factory have all conspired to dampen sales this year – but the resulting fall in the share price is a buying opportunity.