Kenichi Mizushita has managed Fidelity Japan Smaller Companies (FJSCX) since December of 1996. Mizushita joined Fidelity as a research analyst in 1985, covering a variety of mostly cyclical industries. While Mizushita might not be a household name, those who invested in his fund back in 1999-2000 have likely never forgotten his significant (240%-plus) contribution to their portfolio’s performance. Since we’re wading back into Japan in this month’s issue, and since many of you are in some cases weighting international markets more heavily in client portfolios, Mizushita’s experience as a long-standing analyst and top-ranking manager will provide some unique perspective.
What is your investment style and the fund’s objective? My fund’s investment objective is defined by the small-cap market in Japan, which has been expanding over the last decade; and I expect it to continue expanding, backed by new companies’ listings. Last year there were 150 new companies listed in the stock market, and for 2002 I expect more than 100 new companies to come into the market, even if the large-cap stock market situation remains negative. My investment style is basic. I focus on individual companies’ fundamentals. I focus on the earnings and then growth potential for each company.
Do you also focus on the management? And, would you say there is a different kind of management in the small companies in Japan today than, say, five or ten years ago? Yes, to both questions. Ten to 15 years ago most new companies were not as aggressive or driven as they are now, because the top management just wanted to get money from the market through their listing. However, nowadays, a new kind of management has been coming to the companies, and to the market, and they understand the key role they play in growing the company well. The small-cap market is also totally different compared to before the bubble economy of the Japanese stock market.
Can you give us a sense of the capitalization range of the companies you invest in? Right now the average market cap in my portfolio is around $790 million U.S. dollars, but I have been searching for very tiny companies, like $5 million U.S. market-cap companies. Also, within Japan’s small-cap market there are some comparatively large-cap names, so I have to analyze their potential role, too.
The majority of names in your top 10 holdings (which represent over 30% of your fund’s net assets) are consumer discretionary and consumer staples names. What does that tell us about your investment style and where you are finding opportunities in Japan today? If you look at the industry structure in Japan, in particular the small-cap market, there are many service industry companies coming to the market. I think Japan is changing from a manufacturing economy to a service-oriented one, and in this regard is catching up to the “industry” structure in the U.S. For example, last year, of the 150 names that came to the market, more than 60% were from the service industry. I believe the service industry will continue to grow and expand in Japan. That translates into many more companies in the market from which I can pick and choose.
Describe the type of technology names an investor would find in your portfolio. Are any companies that export technology, or are they more related to, say, cellular phones within Japan? The latter. For example, there is a company that is making camera lenses for mobile phones. If you look at the mobile market in Japan, mobile with video, that type of mobile phone has been expanding. I expect within a few years, almost all mobile phones will be equipped with cameras that let the end user do much more than simply access the Internet, view movie clips, etc. This company owns the technology to transform the phone into a camera. I do not currently own any company in the export market, or the Internet, or semiconductor-related equipment companies. While I think we’re becoming a service-oriented economy, I also believe that Japan is still a manufacturing country. In some areas, Japan continues to lead technology. For example, take the mobile phone: In that area there should be some small companies that will have a huge upside potential.
Pharmaceutical manufacturers and biotechs are a significant part of the U.S. growth stock story. Is that going to be a growing area in Japan, or will it remain a fairly small percentage of the economy? Unfortunately the number of biotechnology companies in Japan is small. It is difficult for me to find out about biotechnology-related companies in the small-cap market. My guess is, it’s too early in Japan. Maybe three or five years in the future we will see them.
Characterize the singular strength of the types of companies you invest in. The companies I invest in have a very strong competitive edge in each market.