Taiyo Pacific sees investment shift to Japan shares as ‘sexy’ China cools

Bloomberg

The China-led stock slump that’s taking Japanese equities down with it will ultimately prove a boon for investors in Japan, according to Taiyo Pacific Partners LP, which manages $2.2 billion, including money from the world’s biggest pension fund.

Concerns about an economic slowdown in China and government meddling in its markets has dragged down equities worldwide, with major Japanese stock indexes falling as much as 20 percent from 2015 highs. Meanwhile the performance of the yen, which strengthened to a one-year high against the dollar last week, signals a turning point for investor sentiment, said Brian Heywood, chief executive officer of Taiyo.

“Over the last 10 years, China has been the sexy market,” he said in a recent interview in Tokyo. “There is a shift going on. Japan could benefit from the shakeout of China. It is a safer place to put your money.”

The Topix index, which had slumped 16 percent this year through Jan. 21, rallied 4.9 percent on Friday as investors weighed prospects for central bank stimulus and looked for bargains after the selloff. Before the rebound, the Topix’s valuation fell to the lowest since October 2014 as measured by its price-to-earnings ratio, data compiled by Bloomberg show.

Taiyo, located in Kirkland, Washington, was founded in 2001 and was selected by Japan’s Government Pension Investment Fund in 2014 to manage domestic equities because of its track record and nonhostile approach, the pension fund said at the time. Heywood declined comment on Taiyo’s returns.

Heywood, a Harvard University graduate who first lived in Japan in the 1980s as a missionary, compared Prime Minister Shinzo Abe’s push for corporate reform to the shrine of Ise Jingu in Mie Prefecture, which has been torn down and rebuilt every 20 years for more than a millennium. The Japanese word tokowaka, which means perpetually young through renewal, exemplifies Abe’s approach, he said.

“This is very unique Japanese thinking,” Heywood said. “It preserves tradition, but it renews.”

The money manager is building stakes in Japanese stocks, including companies tied to health care as well as those that will benefit from factory automation, Heywood said, while declining to disclose specific investments.

Taiyo, which typically owns 3 percent to 10 percent of a company, held stakes in Japanese health care companies, including Miraca Holdings Inc. and Peptidream Inc., according to data compiled by Bloomberg. It was the biggest shareholder of Miraca, which develops drugs and medical equipment, with a 8.2 percent stake as of August 2015, and held 7.6 percent of Peptidream, which makes peptide therapeutics, the data show. Miraca shares have slumped 5.8 percent since the end of 2014, while those of Peptidream surged 46 percent. The Topix has declined 2.4 percent in the same period.

The investment firm added to its stakes in Roland DG Corp., which manufactures color printers, and J Trust Co., a financial services provider, according to a Jan. 20 filing with the Finance Ministry. Taiyo only buys shares in companies that want to work with it to improve returns and doesn’t use proxy fights to force change, Heywood said.

Health care will become a big part of Japan’s economy amid the country’s aging population and is poised to lead when China faces similar challenges in 30 years, according to Heywood. He also expects more mergers and acquisitions among health care companies in Japan because of the market’s fragmented nature.

Another shift Heywood said will benefit Japan is automation technology, which enables companies to open factories there at lower cost. Japanese companies that make use of automation stand to gain as manufacturing in China becomes less cost-competitive, according to Heywood.