New manager appointed

Japan specialist appointed as stock picker for Alliance Trust

Japan specialist Dalton Investments has been added to the line-up of managers picking stocks for Alliance Trust’s global equity portfolio. The appointment is designed to capitalise on the attractive opportunity set of under-valued businesses in the market and the country’s corporate governance reforms, including record share buybacks, dividend increases and increased shareholder activism, that are unlocking the earnings potential of many Japanese businesses.

Despite the recent surge in interest among foreign investors in Japan, the Alliance Trust investment committee believe that we are still near the start of the corporate sector’s resurgence. “On a long-term basis, many Japanese companies are still cheap relative to their potential earnings power, so there are lots of legs to this rally,” said committee chair Craig Baker.

“The corporate governance reforms launched by former Prime Minister Abe, assassinated last year, are structural in nature. They have been in train for many years but are now really beginning to bear fruit. Japan is also benefitting from a cyclical upswing in economic growth after the end of decades of deflation, but it has nothing like the inflationary problems we have here in the UK. We want to ensure that Alliance Trust shareholders benefit from expanding investment opportunities.”

However, Baker added that, like all stock market trajectories, it will not be a straight line upwards for Japanese shares. It will require skilled active management and on-the-ground expertise to select the companies most likely to profit. “That’s why we’ve appointed Dalton, whom we have researched and rated highly for over 15 years. We expect them to add a lot of value,” said Baker.

Dalton is a value focused manager headquartered in Los Angeles with several other offices including in Tokyo. The firm is independently owned by its senior executives and investment professionals who invest in its strategies alongside clients, ensuring an alignment of interests with shareholders. It was established in 1999 to pursue investment opportunities arising from the Asian financial crisis and now offers a small range of Asia-focused and global emerging markets equity strategies.

Dalton looks to exploit mispricing opportunities in the most under-researched companies in Japan, which generally steers its focus to small and mid-cap companies. The concentrated, up to 20-stock mandate that it will be managing for Alliance Trust will be run by the firm’s Chief Investment Officer and co-founder James D Rosenwald, plus a team of six analysts based in Tokyo.

Alliance Trust co-portfolio manager Stuart Gray said: “We have a positive view of this strategy largely predicated on the experience and differentiated insights of Jamie Rosenwald, combined with the disciplined nature of the investment process and a depth of analytical support provided by his team. We believe Jamie is an entrepreneurial and experienced investor with good foresight, market savviness and a large network of contacts. We also believe the strategy is well specified and consistently executed within an attractive opportunity set which is a relatively less efficient part of the Japanese market.”

Rosenwald has a strong heritage, which includes working for George Soros as an investor in the Korean market. He has been investing in Japan since his teens when he began working with his grandfather, who had previously worked with Benjamin Graham, the British-born American economist who is widely known as the father of value investing.

The firm’s investment philosophy is based on four principles:

• Buy good businesses with strong cash flows and balance sheets who have a "moat" against competition
• Seek shares that trade at a material discount to intrinsic value, looking to double money over 3-5 years
• Identify companies with an alignment of interest between the business owner/management and minority shareholders
• Identify a demonstrable track record of managing capital effectively and rewarding minority shareholders.

Dalton’s initial allocation of capital is for 4% of the Alliance Trust portfolio, funded from the existing stock pickers. The funding sources are selected to ensure the portfolio’s style exposures remains balanced compared to the MSCI All-Country World Index. As such, the bulk of Dalton’s portfolio was funded from Black Creek and Jupiter.

The addition of Dalton has created a small overweight to Japan versus the index at the current time. “We are not taking a macro bet on Japan per se,” said Gray, “but we do think there is a disproportionate amount ofopportunity in Japan at the individual stock level. We believe that Dalton is the best manager to help us identify the most attractive opportunities to benefit from broader exposure to Japan’s increasingly dynamic corporate sector. It brings a differentiated approach to the Alliance Trust portfolio, providing further diversification and outperformance potential.”

Dalton manages a standalone UK-listed investment trust, called the Nippon Active Value Fund (NAVF). Launched in 2020 to take advantage of a specific opportunity in illiquid, small cap “salary man” (ie very limited ownership in the company for management) companies in Japan, it was designed to engage aggressively with these companies to drive change and unlock value. These companies would historically not have been considered for investment by Dalton because of the lack of alignment of interests.

The strategy that Dalton is running for Alliance Trust is quite different, representing a concentrated version of Dalton’s flagship Japan long only strategy, which it has managed since 1996 (outperforming the benchmark by around 6% gross of fees per annum over that period). This invests primarily in “owner-operator” (ie family/entrepreneur-owned) companies, where there is a strong alignment of interests with management.

Dalton actively engages with these companies, but generally in a much more gradual or gentle manner than in NAVF. There is not generally expected to be an overlap between the two portfolios. A standard Dalton Japan long only account holds around 40 stocks, whereas the 15-20 stock Alliance Trust portfolio is a customized product that cannot be bought off-the-shelf.