Aug 18, 2022 · 58m · capital-allocators
Howard Smith – Japanese Equities at Indus Capital (Manager Meetings, EP.35)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Manager Meetings, UTIMCO's David Wong interviews Howard Smith, Partner and Portfolio Manager at Indus Capital, exploring Smith's four-decade career investing in Japan, Indus's differentiated cross-border operating model, and the corporate governance transformations unlocking profound value across Japanese equities.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 10.5% of the talking time here. How this is scored →
Ted as informed peer 2.5 Guest teaching 4.4 Guest disagreement 0.1 Ted pushing back 0.0
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 20:30 Pushing back against short-term pod shop culture
Howard forcefully rejects the fast-turnover, factor-neutral trading mentality prevalent in Tokyo's modern hedge fund scene, framing it as alien to true fundamental investing.
Hardest push from Ted ▶ 24:24 Questioning PMs located outside of AsiaDavid pushes on the perceived contradiction of running Asian investment strategies with all portfolio managers based in the US rather than in the region.
Biggest teaching moment ▶ 32:16 Mapping Japan's hidden semiconductor value chainHoward educates the audience on how Japanese B2B suppliers produce indispensable lithography materials and tools without which global consumer tech giants cannot operate.
Ted holds their own ▶ 35:49 Probing Q4 2018 drawdown and risk reformsDavid demonstrates deep institutional diligence by specifically citing the tough performance period in late 2018 and the structural risk management changes instituted under Brian Lee.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Overview of David Wong and Howard Smith | 2 | 2 | 0 | 0 | Ted Seides provides an introductory overview of UTIMCO and Indus Capital before handing off to David Wong, who opens with a warm, open-ended question about Howard Smith's upbringing in rural England. | |
| Moving to Tokyo and Building a Finance Career | 2 | 4 | 0 | 0 | David prompts Howard to detail his journey to Japan after college. Howard provides an expansive narrative on learning Japanese, working under Richard Koo at Nomura, writing for the EIU, and moving into equity research at ING Barings. | |
| Formative Lessons from Japan's Asset Bubble Collapse | 3 | 5 | 0 | 0 | David asks how witnessing the asset bubble bursting influenced Howard's philosophy. Howard explains how the balance sheet recession taught him the necessity of analyzing capital structure and cash flows alongside P&L. | |
| Career Progression at Indus and Transition to PM | 2 | 4 | 0 | 0 | David asks about Howard's progression at Indus. Howard walks through the firm's Soros roots, his transition from analyst to head of research and PM, and the launch of the long-only strategy with UTIMCO. | |
| Strategic Value of Managing Equities from California | 3 | 5 | 1 | 0 | David asks why Howard relocated to San Francisco. Howard explains how Tokyo became overrun by short-term pod shops and multi-manager noise, contrasting that with the clarity and corporate access he gets from California. | |
| Indus Capital's Global PM and Regional Analyst Model | 3 | 4 | 0 | 0 | David raises the potential contradiction of PMs being based outside Asia while investing in Asian equities. Howard justifies the structure by emphasizing the global revenue base of their portfolio companies combined with local analyst teams. | |
| The Pasta Research Process and Thesis Evolution | 2 | 5 | 0 | 0 | David asks for details on internal collaboration. Howard outlines the 'pasta' process—a collaborative memo framework used to subject nascent investment theses to rigorous peer review and iterative modeling. | |
| Pan-Asian Synergies and Japan's Semiconductor Moats | 3 | 6 | 0 | 0 | David asks for concrete examples of pan-Asian research synergies. Howard breaks down Japan's critical B2B moats in semiconductor equipment and materials that supply giants like TSMC and Samsung. | |
| Sponsor Message: Ridgeline Investment Management Tech | 4 | 5 | 0 | 0 | David demonstrates allocator diligence by referencing Indus's difficult Q4 2018 performance and the subsequent onboarding of CRO Brian Lee. Howard candidly explains the quantitative VAR and position-sizing lessons learned. | |
| Investment Catalysts and Valuation Disconnects in Japan | 2 | 5 | 1 | 0 | David asks what creates current excitement in Japan. Howard highlights the widespread global misunderstanding of Japan's macro dynamics, arguing that top-tier companies with world-class cash flow trade at steep valuation discounts. | |
| Corporate Governance Evolution and Self-Help Transformations | 3 | 5 | 0 | 0 | David invites stories on corporate governance improvements. Howard shares an anecdote from 2004 where he was ejected from a meeting with a negative-EV company's president, contrasting that past hostility with modern governance reforms. | |
| Firm Culture, Partnership Alignment, and Indus 2.0 | 2 | 4 | 0 | 0 | David praises Howard's open, non-defensive demeanor and asks about firm culture. Howard explains Indus's transition to a leaner partnership ('Indus 2.0') focused on fiduciary duty and constructive internal challenge. | |
| Personal Interests, Non-Fiction Reading, and Mentorship | 2 | 3 | 0 | 0 | David closes with questions on decompression, reading habits, and influences. Howard shares his passion for birdwatching in San Francisco, history reading, and internal mentors. |
Statements from this episode (16)
Smith: Corporate Japan is in a much healthier state than 30 years ago
“I think we've at last worked through that now, and corporate Japan is in a much, much healthier state than it was 30 years ago.”
Smith: Value investing was the predominant model in Japan from 1992 to ~2015
“The period from 1992 after the initial bursting of the bubble really
Up until I think the global financial crisis and beyond, until we got into a global era of zero rates around 2015 or 20 16, value investing was the predominant form of investing, and certainl…”
Smith: Tokyo's investment landscape is dominated by platform hedge funds
“If you look at the world of investing in Tokyo today, you know, it's dominated by the platform hedge funds.”
Smith: Trading outside local market hours shields investors from intraday noise
“Being out of a live market also, I think, is very beneficial to me. The market here opens at five p.m., so I have all day to think and strategize and speak to analysts and read reports and really not get bound up in the babble of the day-to-day tick watching o…”
U.S. investors get better access to Japanese CEOs than Tokyo-based funds
“Pre-COVID, I was actually getting better access to the senior management of Japanese companies here than I ever did in Japan.”
Smith: Majority of Indus Japan fund holdings generate most revenue outside Japan
“If you look at the Japan funds that I manage, the majority of the companies in which we invest are global businesses. They're domiciled in Japan, but they generate the majority of their revenue outside Japan.”
Domestic macro conditions are often irrelevant to Japan's globally exposed companies
“What's happening in the Japanese economy isn't directly relevant quite often to their Futures or their revenue streams or their margins.”
Smith: Japanese competitive moats are often driven by R&D and patents
“Typically it will involve some description of the moat around a company, the barriers to entry, and that's often, in the case of Japan, R&D driven, or technology driven, or it can be patent driven, some sort of intangible asset that's very hard to recreate.”
Japanese companies play a critical role in leading-edge semiconductor manufacturing
“Japanese companies are absolutely critical players in the value chain for semiconductor production. Whether it's the production equipment that's used in lithography or etching or inspection or cleaning or dicing or whatever it may be, or whether it's the mater…”
Smith: Japan is largely a B2B investment opportunity rather than B2C
“Japan is largely these days a B to B investment opportunity. As opposed to a B to C. I mean, of course, there are B to C companies in Japan, and there are very big brands. Japan has some amazing brands like Nintendo and Sony, but a lot of the high value-added …”
Smith: Information Produces Edge Until Marginal Utility Turns Negative
“Drawing the line when the marginal utility of an extra unit of information is no longer positive, I think is an important skill because you can get yourself very confused and you can drown in too much information. So drawing the line on what makes sense and wh…”
Smith: Japanese equities feature world-class companies trading at steep valuation discounts
“So I think Japan has a growing number of world class companies that have world class governance structures, world class capital allocation decisions, but yet do not trade at world class valuations.”
Smith: Japan is a two-tier market ideal for long-short investing
“It is a two-tier market. There are still companies which are not well-governed, which make bad capital allocation decisions, which have very low return on equity. I think it's an incredibly interesting opportunity set for long-short investing, actually. There'…”
Smith: Japanese equity de-rating process is near the end
“But I believe we're very deep into that de-rating process now. And we're a lot closer to the end of it than the beginning of it.”
Smith: 2014-2015 Stewardship and Governance Codes kickstarted capital allocation improvements in Japan
“But I think the advent of the corporate governance code and the stewardship code in 2014 and 20 15 Really kickstarted an additional improvement in governance and capital allocation.”
Large-cap Japanese valuations still fail to reflect massive improvements in corporate governance
“And you can find companies that are buying back two, three percent of their shares outstanding, paying out 50% of the net profit in the form of a dividend, just still trading on 10 times earnings and four and a half or five times EB to EBITDA. So there's a dis…”