Each week, a professional investor tells us where he’d put his money. This week: Michael Lindsell of Lindsell Train.
One of Lindsell Train’s founding principles is to run client money as we would run our own – which means to protect and if possible grow capital. The best chance of achieving this is by investing only in those companies that we judge to be exceptional. For us, exceptional means: likely to be profitably in business in 20 years’ time. It is surprising how few quoted companies meet this test, 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 companies that meet our criteria, we run concentrated portfolios, with 20-30 holdings, and we rarely make changes. Here we look at three exceptional Japanese companies.
Nintendo (Tokyo: 7974) owns perhaps the most valuable collection of video-game content in the world. Its key franchises have sold billions of copies and account for all but two of the top ten best-selling games of all time. However, of late it has struggled to properly monetise this intellectual property. Since the peak success of the Wii and DS consoles in 2009, revenues have fallen substantially as the subsequent generation of consoles failed to match the hype of their predecessors – and struggled to meet the challenges posed by smartphones. But new hardware (Nintendo Switch) has been unveiled to refresh the now four-year-old Wii U, and Nintendo will soon release its flagship Super Mario character as an iPhone app, inspired by the global phenomenon of Pokémon Go – which amply demonstrated the global appeal of Nintendo and its intellectual property.
Kao (Tokyo: 4452) is another globally important business listed and based in Japan. Like Procter & Gamble in the US or Unilever in Europe, Kao sells everyday consumer and personal-care goods with a dominant domestic market position. It holds a top three position in every Japanese personal-care category, with the vast majority of its revenues deriving from products in the number one spot. Kao’s high-quality, Japanese-made products have also found favour with Asia’s emerging middle classes. In China, Kao has established leading positions in critical markets such as high-margin disposable nappies, meaning it now derives almost one-third of sales from fast-growing overseas territories.
Almost all securities trading in Japan takes place on exchanges owned and run by Japan Exchange Group (Tokyo: 8697) – the company has a virtual monopoly. The group also owns the Japan Securities Clearing Corporation, which monopolises the clearing of trades and a wider range of over-the-counter yen transactions. The company earns operating margins of around 50%, which when added to growth in trading has supported strong dividend growth of 29% per annum since 2009. In its role as the owner of the stock exchange the company oversees Japan’s new corporate governance reforms. The example it sets ensures that shareholder returns have been prioritised since the amalgamation of the regional exchanges in 2011.