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Oct 2007 LONG ONLY JAPANESE EQUITIES Since the summer we have built up a nascent position in Morningstar Japan (‘MJ’), the 35% owned affiliate of Morningstar, the US mutual fund rating company. MJ was established in 1998 as a 50:50 joint venture with Softbank Finance. In 2000, having signed a 30 year agreement to use the Morningstar name and methods and to apply them in Japan, MJ listed its shares, with Morningstar selling 15% of its equity to outside investors. SBI, the venture capital specialist (the successor to Softbank Finance), retains 49% ownership. Three of MJ’s eight directors are from the Morningstar Board. MJ monitors 2,000 Japanese mutual funds, representing almost the total mutual fund market and, using its proprietary quantitative tools, ranks the 800 of them that have three year track records with its one to five star ratings. In the USA these ratings have become the seal of endorsement of default in the industry and MJ aspires to attain a similar market position in Japan - one that, once established, provides a huge barrier to entry to other potential service providers. Given that MJ is currently the largest independent fund rating company and the only one that offers a free web-based service to retail fund investors, together with the fact that it is operating in a market in an earlier stage of development than in the USA, our conclusion is that the company has an excellent opportunity to attain this goal, and we are confident that the experience of Morningstar in the USA provides a template for likely growth and success in Japan.Mutual funds in Japan (called Investment Trusts) are relatively immature financial products compared to those in western countries. Still today most Japanese savings are invested in bank deposits and only a relatively small proportion in mutual funds. To illustrate: over 50% of Japanese household financial assets are invested in deposits and less than 5% in mutual funds compared to less than 15% and more than 15% respectively in the USA. As a result the size of Japan’s mutual fund market is only 10% of the US’s even though the economy and stock market are one third the size. The relatively small size of the industry is largely due to the appalling returns generated by the industry - hampered by large fees, exacerbated by the churning of portfolios by the broker affiliated mutual fund providers, and with poor longer-term stock market performance and low domestic bond yields. The relative safety of bank deposits, despite the negligible rate of interest, has therefore been an attractive option for Japanese investors. Following deregulation in the early 1990’s foreign mutual fund managers were allowed into the market, introducing new competition and improved product offerings, and this has ultimately led to a renaissance in the industry which recorded its highest historical assets under management at the end of September of U$1 trillion. Indeed, the second largest bond mutual fund in the world is now the Kokusai Global Sovereign Open Fund, at $47bn, designed for income hungry retirees who are paid monthly dividends. So long as the industry continues with its recent trend of innovation, providing products that the market wants and delivering on performance, we think there is a great secular growth opportunity for the Japanese mutual fund industry. MJ is part of that opportunity as the biggest independent fund rating company in Japan. No other company offers such a broad retail focussed service and well-known western names such as S&P, Bloomberg and Lipper compete only in the institutional market. Moreover, most domestic competitors are not independent as they tend to be affiliated to big mutual fund distributors such as Nomura or Daiwa. Morningstar.co.jp is the lynchpin of the business. At the moment MJ only earns advertising revenue from its web-based service (where page views are today running at 17m per month versus 8m just a year ago) but in future they plan to charge for a premium rating service in the same way as occurs in the USA. As an indication of the potential, the premium service in the USA provides over 80% of the revenues earned from the US web site. Other important revenues include a traditional subscriber based institutional service and licensed data for financial institutions. More significantly, what has even more potential are the revenues derived from advising on fund of fund portfolios for the growing defined contribution pension industry, as these attract ad valorem fees akin to asset management revenues. Such ‘assets under advice’ have grown over the year to September 2007 from $500m to $2,400m. Unlike the USA, Japan has few independent financial advisors and instead most financial advice is provided by larger incorporated financial companies. In the USA Morningstar provides products to support the daily operations and research processes of IFAs - a business MJ would dearly like to offer in Japan if the industry ever fragmented. MJ earns 35% margins from its core advertising, subscription, data and ‘asset advice’ based revenues, roughly equivalent margins to those in the USA. US comparable revenues are 20 times larger. On the assumption that MJ is able to benefit from the growth of the mutual fund market in Japan to a size proportionate to the scale of its economy or stock market relative to the USA, the Japanese mutual fund market would triple in size from here. Although this will doubtless take time we think accumulating a position in a company that requires almost no capital to grow its business, on a free cash flow yield on enterprise value at 5% or above, should prove a highly accretive investment. Michael Lindsell Oct 2007 13 Nov 2007 LTL 000-054-0 |
This document is intended for use by professional advisers, UK FSA authorised persons or those who meet the FSA intermediate investor classification. It is not intended for use by private individuals.
Opinions expressed whether in general or both on the performance of individual securities or funds and in a wider economic context represents the view of the fund manager at the time of preparation and may be subject to change without notice. It should not be interpreted as giving investment advice or an investment recommendation. This document is produced solely for information purposes only and may not be copied or distributed without expressed permission. Past performance is not a guide or guarantee to future performance. Investments are subject to risks and their value and income from them may go up as well as down. Investors may not get back the amount they originally invested. Issued by Lindsell Train Limited Authorised and regulated by the Financial Services Authority |
| 2008 | |||
| Jan | I Forgot More Than You'll Ever Know | Japan Eq | |
| Feb | Cash Hoarders & Debt Dependants | Japan Eq | |
| 2007 | |||
| Jan | Japan Eq | ||
| Feb | What's up in 2007 | Japan Eq | |
| Mar | Japan Eq | ||
| Apr | Japan Eq | ||
| May | Various thoughts on Japan | Japan Eq | |
| Jun | Idea Updates | Japan Eq | |
| Jul | The Bids | Japan Eq | |
| Aug | Japan Eq | ||
| Sep | Japan Eq | ||
| Oct | Japan Eq | ||
| Nov | On the Failure... | Japan Eq | |
| Nov | Is Japan a 'Buy'? | Japan Eq | |
| Dec | Japan Eq | ||
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