The Exchanges

Q Why don't you walk through an example? Maybe a stereotypical example could be a past portfolio company, could be something in the portfolio of just soup to nuts, how you found it, the state of the company, valuation, and what's happened.

A Nago has a company, one of our long-term favorites. They make temporary shelters, you know, kind of trailer-like offices that you rent to put on a construction site, or maybe use it as a temporary storage, temporary housing in an earthquake or a natural disaster. Relatively high spec. An average unit is about 3000 dollars. The company makes them, rents them, and refurbishes them, and then resells them. The interesting thing about this company was when we found it, they were trading at a discount to the value of the units that they owned. If the company at the time said we're going to sell all the units, And take the cash and dividend it out. It would have been an eight X. So we were like, wait, wait, this can't be right. And of course, going back to our balance sheet forensics conversation, they had depreciated all of the units. You know, it's a seven year depreciation cycle. They were all depreciated to zero, but they had a market resale value of 3000 dollars. There's a robust market in the reselling of these things, and the company controlled that market. So we're like, okay, so you've got eight times your market cap in units, and this was in the midst of a depression in the construction industry. So after we met with the brothers who owned the company, Cousins, Takahashi, they were third generation, and the first thing that was interesting to me, at least, is they were like,…

AI assessment note: “Nago has a company, one of our long-term favorites. They make temporary shelters”

Q So David, why don't you take me back to the beginning, and how in the world you got to Japan?

A That beginning. Wow. Actually, I got to Japan from, my family moved here. I was at Loyola In Los Angeles as a film major, and my father came to Japan to work for McCann Erickson Hakuhodo as a producer. This was 1981. And Loyola had a reciprocal relationship with Sophia, being Jesuits. So I arrived summer of 81, and I would say I've been here continuously since then. I went to Sophia for a year and a half, then went back to, to finish up my degree. Cal was very flush with Japan experts, and that got me straight to Columbia. Almost segued from one to the other, which of course elevated the level, because my professors at Columbia in the grad school, Hugh Patrick and Jerry Curtis, and all the people who have deep tentacles into Japanese politics and business, So when I graduated, boarded a plane for Tokyo and sat down at the desk at first in Lehman Hutton, I mean, right when Nippon Life purchased steak in the company, and that was the start of everything.

AI assessment note: “Actually, I got to Japan from, my family moved here.”

Q How did you experience Japan back in the eighties?

A Japan in the eighties, it was the bubble economy. Everything was very go-go. Money was sloshing around, real estate was going through the roof, the stock market was going through the roof, and it was going through the roof in kind of all the wrong ways, because people were borrowing against their real estate to buy stocks, and borrowing against their stocks to buy more stocks. It was all kind of a recipe for disaster, which of course, when they burst the bubble, That's what happened, but the markets where I operated, arbitrage and futures and whatnot, they made no sense, and Japan was economically very powerful, number two to the U.S. There was a lot of catering to Japanese financial institutions by U.S. financial institutions. There was quite a bit of fear amongst U.S. institutions and corporations, you know, makers, car makers, Agriculture and whatnot. You know, how are we gonna defend against the onslaught of, you know, Japanese financial power coming into the United States and buying everything. Rakuto Center. It was a strangely friendly yet adversarial relationship. It was like you never could quite figure out. We were working together. We were working against each other. I was at Lehman. Obviously the big relationship was Nippon life. And as an employee, we're like, so, do we work for Nippon Life? Are they partners, or what are we doing? And we always have Nippon Life guy…

AI assessment note: “Japan in the eighties, it was the bubble economy. Everything was very go-go.”

Q And so what does that portfolio look like when you put it together?

A From a portfolio management perspective, it's a completely bottom-up portfolio of companies that excel in their field, whatever they're doing, have Teflon balance sheets, generally have zero debt. It's usually negative net debt, have a moat around their business, Sometimes there are More than one company in a similar industry. Like healthcare, for a very long time we've had two or three companies in healthcare because they were very cheap. Maybe chemicals, one or two, but there's not a whole lot of industry concentration by number of companies. Again, because it's so bottom up. There's usually 12 to 15 names in the portfolio in various degrees of progress. Right now we've probably got Three or four that are well advanced, and we're doing a lot with management. We're pretty happy with what's going on. Maybe one that we might consider exiting for the right price. There are six names where we're building positions. We tend to have five percent cash in the portfolio, somewhat opportunistically. We never lever. We're a terrible prime brokerage client. We don't short, and we don't borrow money. Like, why do you have a PB account again? Well, because we have currency swaps, so you need to have an ISDA agreement. If you need an ISDA agreement, you can't have a regular account. So, thinking about the portfolio, we have 12 to 15 super cheap names. Certainly when we buy them, hopefully th…

AI assessment note: “There's usually 12 to 15 names in the portfolio in various degrees of progress.”

Q So as you look out over the horizon, whether that's five, 10, or who knows, maybe another 20 years for Symphony, what does it look like?

A 20 years, you know, hopefully the next generation. I mean, we'll, We'll still have our hand in. The next generation will be doing their job and taking over and engaging with management, and we've been working with our guys. This team has been cohesive, so I think it's a place that will continue, hopefully, in perpetuity and become a real fixture in financial markets in Japan. We could see both a change and a broadening of the opportunity set as things become more competitive. Because the market itself being less willing to rationalize itself means more work for us, which is fine, but as it becomes more willing to rationalize, that creates many more opportunities for us. So I could see how the opportunities for Symphony to continue to both grow the asset base because there'll be more things to deploy it to. Back when we started, you know, we're deploying into three, five, seven hundred million dollar market cap companies and trying to buy 10, 20%, and now companies of one, two billion dollar market cap size can become a target. Because those management teams are willing to do the things that we would have been limited to doing with smaller companies. So all of a sudden you went, wow, I can, I can do this with a two billion dollar company because, you know, maybe the company's grown in size since we started looking at it in terms of its market cap, but it's still damn cheap. To g…

AI assessment note: “20 years, you know, hopefully the next generation. I mean, we'll, We'll still have our hand in.”

Q David, when you started in 2000, this notion of super cheap companies trading at a cash on the balance sheet, combined with, as Shibata-san described, a Japanese corporate culture that puts the shareholder last. What happened when those two things came together?

A Symphony happened, literally, because we realized that the forces that drive the company and the forces that drive the stock market are two completely alien concepts. Management's good. The company is good. Share price is bad. Management would be like, well, we're not in charge of the share price because we don't trade stock. So we realized that while anybody doing their financial gymnastics and saying, well, I can buy this company and do, no, you can't. I mean, it's trading there, but you can't buy it. And that concept for people is like, well, what do you mean? I said, well, yeah, you can, you can buy 50,000 dollars worth of stock or a 100,000 dollars, but you can't buy the company there. And there's no real mechanism by which you can go into the market Buy it and then be able to get that arbitrage. So what we realized was that despite the mispricings, the only way to actually profit from it was to work with the company to get the pricing of the shares to more accurately reflect the value of the company. And in the absence of a, what's called unregulated, unfettered market for corporate control, That is a very difficult concept to impose upon a management team that's never had to deal with the stock market. Like, why do we care about shareholders? Well, it's not really about shareholders. I mean, it's about you. Then why are you listed? You listed, and when you did that, when…

AI assessment note: “Symphony happened, literally, because we realized that the forces”

Q Now around that time in the early noughts, you had this really first wave of US activists coming into Japan, and there were some local ones as well. What happened with that wave?

A Yeah, it was a bit of a bloodbath. We knew both some of the companies that those guys were going after personally, and obviously we knew the actors. And there was definitely a Belief amongst the activists that, well, it's listed, so we're just going to go in and take it. And that was met with a backlash that they were pretty much unprepared for. And it came from all sides. First it started out, it's like, oh, it's Commodore Perry coming again. It's like, it's not foreign, it's like foreign and domestic. And the ugliest ones were, of course, domestic. The ugliest battles, but the business culture and, and, you know, society was not ready for the kind of hostility and just pure greed that it looked like in these transactions. And we all know who the players were and, you know, the math is pretty easy. My job as a fund manager is to buy things cheap and sell them dear and make money for my, my investors or my beneficiaries and whether that a pension fund or whatnot, that's my job. That asset's too cheap. I want to go buy it. Of course, the people guarding those assets thought it was theirs. And they were much more concerned with the ongoing concern issues as opposed to the balance sheet issues. There was a huge disconnect between who owns a company and what that means in terms of who owns the assets and who they're supposed to be working for. Are they supposed to be working for th…

AI assessment note: “it was a bit of a bloodbath... and all of those guys got blown out”

Q As you look at The trends in place, both for governance, for the pension system, and the pricing of stocks. How have you taken all of that information and gone about turning it into a portfolio to invest?

A You have a combination of what's the mispricing. How big is the mispricing? Then of course you have the issue of what's the general moat around the business? I mean, is it a protected business? And then of course it's a world What kind of management team is running this company, and do they have the wherewithal, the capacity, the desire to do something about their share price? And the truth of the matter is, we come to many companies where the answer is no. They don't. All the other things work, and management's just like, Yeah. So companies we like that have that, let's call it flawed or inappropriate management team for what we want to do, we put them to the side and wait for that management team to transition in one way or another. Just like, okay, you're not going to be there forever. We may not be here forever either, but when you change, you've got all the right components to be worth two or three times what you're trading at. The ones that do have the right management team, then we start to engage them and try to understand how malleable they are, how much we can really kind of massage them into understanding the two-way nature of being listed. There's a give and a take, and do you want to be listed or don't you want to be listed? Then you start talking about, well, yeah, we don't really want to be listed. Ok, then there are some interesting opportunities we can help you…

AI assessment note: “You have a combination of what's the mispricing. How big is the mispricing?”

Q So David, you roll forward. You've been through this bubble. You've been through this bust. What was the impetus for starting symphony?

A Well, it first started, obviously I'd spent a lot of time doing arbitrage, buying cash selling futures, or options arbitrage. So things kind of made perfect sense. I'm going to buy one asset and sell another, and I'm going to make an expected return. And in that process, I was requested to do a lot of basket pricing and things like that, and noticed that there are some companies trading at a discount to cash, which I You couldn't understand. I get the arbitrage thing, but how could the stock market Allow real operating business to trade at a discount to cash. I said, well, that, that can't be right. I mean, if I step back and just do this simple math, discount to cash, I buy the company, and I give the cash to myself, and I have an operating business, and you guys can keep the operating business, I'll keep the cash. Pretty basic stuff, and this was not like phantom cash, or things that were tax maneuvers, or any kind of accounting, it was cash sitting in a bank, or as a portfolio of securities. So I spent quite a number of years actually trying to understand both how and why the stock market was discounting so many of these companies, and there were literally hundreds of them, and why nothing was being done about it, and why doesn't this happen? And it got me thinking that the long-term investment in deep value names in Japan probably is the best place to put your money. I don'…

AI assessment note: “noticed that there are some companies trading at a discount to cash”

Q When you look at this landscape on paper at the time, it probably felt like shooting fish in a barrel, but as you said, most of these companies had this big disconnect. How did you go about figuring out which ones you could work with to try to extract some of the value from the business?

A Willie Lowman. Literally, it was the Willy Loman strategy. We filled up our backpacks with our laptops, put on our best loafers, got some power bars. What were we eating back then? Uh, calorie mates. And we'd get on the train, And we'd go to Osaka, we'd go to Nagoya, and we'd meet, and meet, and meet, and meet. Every day, we'd be traveling around the country, trying to meet with these management teams to try and understand what the hell's going on. Because, I mean, none of this is on the balance sheet or the income statement. There's some reason, and trust me, there is a reason why the company is cheap. And it may be that management doesn't want any more shareholders. It may be that they don't have an IR department so they wouldn't even know what to do. There's always some kind of anecdotal story as to why a particular company trades at the really wrong price. Underneath the overall umbrella that, well, it doesn't need to be listed. So, we found companies through just hard work. You can screen for cheap all day, because that's a calculation, and actually when we started, one of the things that we found ourselves doing a lot, and it somewhat became a tagline for us, was balance sheet forensics. And it's not because the Japanese were hiding anything. It's the rules for how you marked things and disclosed things were very different. For example, you didn't have to mark to market y…

AI assessment note: “Literally, it was the Willy Loman strategy... trying to meet with these management teams”

Q So as you look at the competitive investment landscape today, where do you see small cap value players, other activists across Japan?

A Clearly people in the past two, three years have Started to really take notice and try and deploy more assets to Japan, try and shake things up. I think some of them have been successful in their one-off, two-off trades, whatever. A little bit too hostile for us, but I think the environment is a little bit more accepting of that. I don't think those players, I wouldn't necessarily call them value guys. Maybe there's some value in it, but everybody can use a different definition of value. There are a couple of balance sheet optimization transactions that might be in there, but not clear. Tokyo Dome, which is in the midst right now, yeah, it's got a lot of real estate, but it needs a lot of money to fix it. So, you really need an operator to come in and do the transaction. It's not like dead money sitting there. So, I think we're at that point in the cycle where people are once again emboldened to take a flyer on Japanese companies because of the general trend towards better governance and more openness towards control. And then Japanese companies really looking to preserve their future, and within that comes acquisitions. I want to twist your question around a little bit, because the competitive landscape for us is not really other funds. It's Japanese corporations. Because other funds are great, they can go out and do things, but the best buyer and the biggest proponent of chan…

AI assessment note: “the competitive landscape for us is not really other funds. It's Japanese corporations.”

Q and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. David, there have been so many fits and starts over the last 20 years of the perception that governance in Japan was changing. Where are we today?

A Fits and starts is a good way to describe it because it has these lurches forward. Trying to lump it all together, saying it's universally moving this way or universally moving that way, probably does a disservice to both the people who are doing a good job and the ones who are doing a bad job. I think there are some companies that have really taken it to heart, and that's what I mean by it is considering shareholders return in how they manage the company and the listing. By and large, you know, whether it's ESG or governance in and of itself, there are things that Maybe the Japanese do better than the West. Executive pay, stock options, you know, all kinds of things that, you know, big question mark. Should we be worrying about this quarter's earnings or this decade's earnings? I think some of the transparency issues have gotten better across the board. I think there's still a little bit of cloak and dagger stuff going on, but the general direction has been positive. It's being created as, you know, we said this 20 years ago. This is not a CalPERS, CalSTRS, Hermes problem. This is a Japanese pension fund problem that the Japanese have to decide for themselves To start paying their beneficiaries properly. You can call it whatever you want. You can call it better governance. It doesn't matter. The companies are generally just not being managed in a way that rewards their shareho…

AI assessment note: “I think some of the transparency issues have gotten better across the board.”