Interview 006_Toru Abe
Dec 25, 2011
byInvestment in Japan
Company: S.O.W. Inc.
Please describe both your investment philosophy and methodology.
My investment philosophy, I believe, involves looking closely both at the investment target itself and at the people who affect the value of that investment target. In particular, I think there are still many attractive investment opportunities out there, if one has a thorough knowledge of the people who affect the value of the investment target, if one builds private relationships with those people, and if one understands the investment target itself.
This is a different approach from the procedure of looking at corporate securities reports or ranking reports on “paper” or on the “computer screen.” We believe that, looking at situations where people involved in the market are at risk, if the actual situation is firmly grasped, there are attractive investment opportunities. Our aim is to provide a return to the investor while also providing support to raise the value of such investments, while closely monitoring the attendant risks. So, to repeat myself, I think it is very important to build private relationships with the people who affect the value of investment targets.
In addition, investments should be based on the normal flow of business financing. Moreover, I also believe that if profits are overly biased toward the investor on the one hand, or the business entity on the other, then that relationship will not last very long. It is important to forge a win-win relationship. In other words, it is by providing opportunities to both sides that investing becomes possible which will continue to be profitable to both sides.
I may have come to this philosophy because of my background in banking. Banks are treasure houses of investment opportunity information. They do business with many very attractive business people. A bank is also a manager who receives money from its depositors and then puts that money to work, and who is also responsible for returning the original deposit.
We also receive an “appropriate” return as a reward for taking risks, and are closely monitored, just like a bank. We want to maximize the return after controlling the risks and to safeguard the principal.
In order to do that, in terms of what is particular about how we manage investments, we have adopted the stance of placing more weight on long-term investments and income gain, avoiding excessive risks by not leveraging funds, or by doing our best to keep that to a minimum, while recognizing and fully understanding the risks faced by those participating in the markets. Thus, by aiming at the gap between apparent risks and the real risks which we understand, we hope to generate excess revenue.
Please explain why there are current investment opportunities in asset finance.
In terms of environmental factors, I think that the capital restrictions on banks are a huge problem. It is now extremely difficult for a bank to become aggressively involved in anything except government bonds, regional bonds, loans to the top echelon companies, and home loans. I think this is due to the convergence of many different factors, against a background of a declining trend in loan amounts since about the end of the 90’s. There is no question that such capital restrictions are involved here. On the business side of things, with businesses being evaluated by various business indicators, or with businesses persevering in the context of the introduction of market value accounting, to expand one’s own capital or one’s assets by borrowing, is no longer considered a very laudable way to do business. In addition to that, there is also the aspect of capital restrictions on banks operating to effectively increase the risks to businesses that increase their assets by borrowing.
More fundamentally, indirect financing and direct financing (i.e., issuing stock or corporate debentures or the like) constitute very important capital procurement means for businesses, but those two means alone are not sufficient. I think that the diversification of capital procurement will be what supports Japanese business. Asset financing does not at all represent a new means of capital procurement, but, in an environment like this, there are needs, which means that, for the investor, there are investment opportunities. That’s what I think.
Please explain the transition from your former career to the money management industry.
As I mentioned earlier, my former career was in banking, and I felt that my job of assisting and supporting business people was very rewarding. However, during the financial crisis in Japan that began around 1997 or 98, I came face to face with the limits of indirect financing, finding it impossible to make loans which I wanted to make even to good companies.
So, after that, I got out of banking, and built the company called SOW. However, while operating my own business, increasing the capital in that business, and undertaking financial advisory work for companies, I was very keenly aware of the limits of direct financing.
At SOW, moreover, we undertake real estate asset management work, but with there being a demand on banks and funds to function as “managers” of deposited funds, it looks as though the “ethical problems” with that may gradually be manifesting. If one is going to be involved in funds management, one should have solid ethical standards, and that must be true of the overall industry. We have a very strong problem awareness in this regard.
In this context, we have repeatedly asked ourselves, as the SOW team, what about our knowledge, our skills, our experience, and also our ethics (corporate culture)? Do we have what it takes to be a money management company? We have been pondering that for ten years since the company was founded. And now, after all that, I think we have become a good team that is an amalgamation of experienced finance and real estate people.
I feel that this business area, where we, because of who we are, can demonstrate our capabilities and strengths, has created an investment opportunity that we call asset finance, where we can make up for the inadequacies of both indirect and direct financing, and where we can increase the choices available to both investors and businesses. And, in all earnestness, I want us to continue to strive to ascribe to the highest ethics as managers.
What is your personal credo as a portfolio manager? What are you constantly striving to attain, or conversely, trying to avoid?
I think my personal credo is that I want to bring about investments that are socially significant. In terms of investment target, I am not going to invest in something for the sole purpose of making a short-term gain. Again, I look at the people that make up an investment target, and then try to get involved with investments with people I can trust, that are engaged in projects that I feel are significant, that I feel inclined to support, and with whom I can build a win-win relationship.
It goes without saying that I will not entertain an investment opportunity unless I would invest my own money in it.
Another important question to ask is, why is this investment being made? Regardless of to whom this question is addressed, if the investment is one that one has trouble rationalizing, then we’re not going to make the investment. I spoke earlier about ethics, but we are a venture business, so we have the freedom to carry out our business so that we can take pride in the fact that we will not compromise what cannot be compromised. We want to facilitate investments that we think are proper, in the light of the fund concept, and in the light of our own credo.
Meanwhile, account managers have a tendency to become swallowed by the investment target. When this goes too far, the investment target can end up being the only one who gains. And we have of course taken pains to create mechanisms to prevent this from happening.
I hardly need to say this, but I feel there are very many cases where not going ahead with an investment is better, as a result, for the business entity.
Please explain how you protect the assets of your customers.
In corporate finance, there are two major uses that capital is put to. One is costs, symbolized by sales and management costs, and labor costs in particular, on the Profit and Loss Statement, and the other is the left-hand side of the Balance Sheet, that is, the capital that goes toward assets. We understand how important it is to invest in people. However, that capital gets consumed. I’m referring to increasing working capital or R&D capital. This dept repayment truly becomes business revenue.
On the other hand, I think that capital which goes towards assets always comes back, if the assets are all properly managed, and if the current value is properly controlled. Assets themselves provide asset protection. As a consequence, the market value itself is extremely important. Moreover, if the cash flow generated from the assets is healthy, investments will be properly returned. I think that indeed is what fluid assets are. Through being concerned about these things, I hope to protect our clients’ assets.
In that sense, I want to be very circumspect about positioning myself in an environment where I cannot control my assets myself, that is, in leveraging my capital.
Let me add that we wish to continue to strive to become a professional group that controls the fluidity of various assets, the stability of the cash flow generated from those assets through contracts, etc.,, and to also secure an outlet for them.
Would you recommend any particular investment book? (Please write in a summary of the book, together with your thoughts and evaluation.)
Of the books I have read recently, Baazeru haisen, ginko kisei wo meguru tatakai [Basel Defeat: The Battle Surrounding Bank Restrictions] (by Yasuo Ota; published by Nihon Keizai Shimbun) has left a deep impression on me. I think this book will provide a great resource in considering what problems will develop with respect to bank capital restrictions, and in determining which direction these developments will be in, particularly when considering such topics as “what kind of investments are good” or “what is going to happen to our economic and financial environment.”
Please tell us what media (newspapers, magazines, websites, etc.) you check on a daily basis in order to gather information, particularly information pertaining to business operations.
Well, this is very ordinary, but I read the Nihon Keizai Shimbun [Japanese Economic Newspaper, nickname: Nikkei]. The electronic version of Nikkei is also a useful resource. Besides that, I read weekly magazines such as Diamond, and monthlies like President. For information uniquely useful to our company, there are distribution information magazines such as the Shogyo Shisetsu Shinbun [Commercial Facility Newspaper] or Nikkei MJ, and real estate information magazine websites such as Nikkei Fudosan Maaketto Joho [Nikkei Real Estate Market Information] or Gekkan Puropati [Property Monthly].
This is off-topic, but I’m actually addicted to underground quarterlies. I’m currently restraining myself, but I am also an individual stock investor. In my investment career to date, I have been doing quite well (laughter).
That’s all the questions we have. Thank you very much for your cooperation.
Managing Director, Investment and Research
This article originally appeared on June 16, 2011. Any views presented in this article are as of such date and are subject to change.
This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.