Yen keeps going from strength to strength!

[Tsumitate Wrestler]

As for people investing in index funds like All Country, if you do the sums an investor here on the board with say 100 million yen invested in eMaxis Slim All Country will most likely not have enough shares in each individual Japanese company to qualify for yutai anyway. For example, Toyota is only 0.225503% of the index, and Sony is 0.153345%. Remember you need to have at least 100 shares to qualify for yutai.

The point I was making is that by entrenching poor management teams, long term shareholder value creation is impaired. This hurts all investors in passive indexes who invest in these companies. Of course anyone buying a passive fund won't qualify for yutai anyway, regardless of how big the company is in the index.

Companies want to give more rewards to docile retail shareholders who don't tend to vote in AGM's rather than instutional investors who are signed up to the Stewardship Code and will have a voting policy and disclose how they vote on each resolution.

To reiterate, passive funds based in Japan do indeed get the benefit from Yutai, but to a much lesser degree. They apparently sell these items off at a bit of a discount, and third parties resell them for more margin.

[ChapInTokyo]

As for people investing in index funds like All Country, if you do the sums an investor here on the board with say 100 million yen invested in eMaxis Slim All Country will most likely not have enough shares in each individual Japanese company to qualify for yutai anyway. For example, Toyota is only 0.225503% of the index, and Sony is 0.153345%. Remember you need to have at least 100 shares to qualify for yutai.

The point I was making is that by entrenching poor management teams, long term shareholder value creation is impaired. This hurts all investors in passive indexes who invest in these companies. Of course anyone buying a passive fund won't qualify for yutai anyway, regardless of how big the company is in the index.

Companies want to give more rewards to docile retail shareholders who don't tend to vote in AGM's rather than instutional investors who are signed up to the Stewardship Code and will have a voting policy and disclose how they vote on each resolution.

Interesting．So where can I see how MUFG voted on each resolution of the 3,000 companies that they track in the eMaxis Slim All Country fund? Must take a lot of work to keep on top of all those companies...

[Deep Blue]

Interesting．So where can I see how MUFG voted on each resolution of the 3,000 companies that they track in the eMaxis Slim All Country fund? Must take a lot of work to keep on top of all those companies...

The Japanese Stewardship code applies to companies investing in Japanese listed companies.... so not 3,000, more like 183 in MSCI Japan (if they track MSCI indexes, I can'tbe bothered to check).

In reality, large institutional investors engage support firms like ISS or Glass Lewis to help with proxy voting. They'll usually give their policies and voting criteria to say ISS, who will then apply them to investee companies AGM resolutions and provide recommendations how to vote to the asset manager.

The asset manager will then have staff who review the recommendations and make the decision on how to vote on each proposal.

I hope this helps explain how it works in practice for you.

[ToushiTime]

But I think that in his puritanical zeal he sort of equated 'ETFs' with 'Passive Investing'.

Shack's gripe was against the ETFs that are passive in name only, by virtue of tracking esoteric indexes often created to justify their own existence. As far as I could tell, he wasn't talking about active ETFs such as the AVUS, AVDE, and AVUV you mentioned, which are not index-based.

I guess his point was that the niche index tracker funds can have so many rules and screens, and relatively few holdings, that they amount to a highly active investment strategy, and tempt investors to move in and out of them as economic and market conditions change.

[ChapInTokyo]

But I think that in his puritanical zeal he sort of equated 'ETFs' with 'Passive Investing'.

Shack's gripe was against the ETFs that are passive in name only, by virtue of tracking esoteric indexes often created to justify their own existence. As far as I could tell, he wasn't talking about active ETFs such as the AVUS, AVDE, and AVUV you mentioned, which are not index-based.

I guess his point was that the niche index tracker funds can have so many rules and screens, and relatively few holdings, that they amount to a highly active investment strategy, and tempt investors to move in and out of them as economic and market conditions change.

Gotcha. I guess theme index ETFs tracking AI or quantum computers.

[ChapInTokyo]

Interesting．So where can I see how MUFG voted on each resolution of the 3,000 companies that they track in the eMaxis Slim All Country fund? Must take a lot of work to keep on top of all those companies...

The Japanese Stewardship code applies to companies investing in Japanese listed companies.... so not 3,000, more like 183 in MSCI Japan (if they track MSCI indexes, I can'tbe bothered to check).

In reality, large institutional investors engage support firms like ISS or Glass Lewis to help with proxy voting. They'll usually give their policies and voting criteria to say ISS, who will then apply them to investee companies AGM resolutions and provide recommendations how to vote to the asset manager.

The asset manager will then have staff who review the recommendations and make the decision on how to vote on each proposal.

I hope this helps explain how it works in practice for you.

That makes sense. For an index fund with razor thin margins, outsourcing proxy voting to subcontractors who can spread their costs over a number of client funds certainly would be cost effective. Thanks for clarifying how things actually work in the industry.

Having said that I still don’t feel that it’s right to equate shareholder perks with sub par management.

For example, many companies have discount schemes for shareholders which are likely reducing profits but perhaps have some upside in good word of mouth.

For example, Ryohon Keikaku provides a 7% off MUJI purchases perk valid for six months to shareholders of record. Their gross profit is 8.5% so this is not being subsidized by any overseas or institutional investor. Investors in Japanese companies are often avid fans of the companies and their products. This kind of investor ‘lock in’ is more proactive IR than the idea of simply increasing ‘docile’ retail investors imho.

[Deep Blue]

Having said that I still don’t feel that it’s right to equate shareholder perks with sub par management.

I would agree it is not a 100% correlation, but I would suggest - like other things that entrench management teams (cross shareholdings, poison pills, too few independent directors etc) - that it is a red flag that should be evaluated as part of the overall view on the governance of any company. Good, competent management teams don't need to protect themselves from shareholders with these sort of devices.

[Deep Blue]

For example, Ryohon Keikaku provides a 7% off MUJI purchases perk valid for six months to shareholders of record. Their gross profit is 8.5% so this is not being subsidized by any overseas or institutional investor. Investors in Japanese companies are often avid fans of the companies and their products.

I have not checked but given the type of retailer Muji (Ryohin Keikaku) is I would expect gross profit margin to be in the 40-60% range, not 8.5%.

Perhaps you are thinking of operating or net margin?

Interestingly Ryohin Keikaku was one of the worst managed retailers in Japan for much of the last decade - underinvested in IT, running supply chain management on Excel worksheets, frequently messing up on inventory control, an ill-fated expansion into China.... they only turned around in the past two - threse years when they got in Domae-san from Uniqlo who introduced some professionalism and a strategy shift, which is bearing fruit recently.

I am unsure of whether this new strategy of opening suburban stores next to supermarkets/shopping centres is the right long term strategy but certainly he has made much needed operational improvements, bringing some of the knowledge from Yanai-san & team at Fast Retailing, who are best in class in my view.

[ChapInTokyo]

For example, Ryohon Keikaku provides a 7% off MUJI purchases perk valid for six months to shareholders of record. Their gross profit is 8.5% so this is not being subsidized by any overseas or institutional investor. Investors in Japanese companies are often avid fans of the companies and their products.

I have not checked but given the type of retailer Muji (Ryohin Keikaku) is I would expect gross profit margin to be in the 40-60% range, not 8.5%.

Perhaps you are thinking of operating or net margin?

Interestingly Ryohin Keikaku was one of the worst managed retailers in Japan for much of the last decade - underinvested in IT, running supply chain management on Excel worksheets, frequently messing up on inventory control, an ill-fated expansion into China.... they only turned around in the past two - threse years when they got in Domae-san from Uniqlo who introduced some professionalism and a strategy shift, which is bearing fruit recently.

I am unsure of whether this new strategy of opening suburban stores next to supermarkets/shopping centres is the right long term strategy but certainly he has made much needed operational improvements, bringing some of the knowledge from Yanai-san & team at Fast Retailing, who are best in class in my view.

Thanks for pointing this out. I meant the operating profits rather than gross profits.

And I agree wholeheartedly with your assessment of the recent performance of Ryohin Keikaku being largely due to Domae san’s leadership, honed from his years under Yanai-san at Fast Retailing. It’s a lovely example of how companies can be turned around under talented leadership.

[ToushiTime]

But I think that in his puritanical zeal he sort of equated 'ETFs' with 'Passive Investing'.

Shack's gripe was against the ETFs that are passive in name only, by virtue of tracking esoteric indexes often created to justify their own existence. As far as I could tell, he wasn't talking about active ETFs such as the AVUS, AVDE, and AVUV you mentioned, which are not index-based.

I guess his point was that the niche index tracker funds can have so many rules and screens, and relatively few holdings, that they amount to a highly active investment strategy, and tempt investors to move in and out of them as economic and market conditions change.

Gotcha. I guess theme index ETFs tracking AI or quantum computers.

Well, I'm guilty on that front. I have invested in a handful of quantum computing stocks but just for my fun portfolio and not via ETFs.