Over the past three years, Warren Buffett has gradually accumulated stakes in five Japanese conglomerates, the so-called soga shosha, namely, Itochu Corp., Marubeni Corp., Mitsubishi Corp., Mitsui, and Sumitomo Corp. As Japan recovers from what felt like a 30-year downturn, these Buffett’s investments in Japan (which are, intriguingly, funded by a yen denominated loan) are drawing a lot of attention. (Berkshire Hathaway is a part of Marcellus’ Global Compounders Portfolio).
As the FT says: “Buffett, who began accumulating stakes in the so-called sogo shosha three years ago, sees the shareholdings as a bet on a handful of neglected enterprises that are set to make attractive profits.
In between audiences with some of the country’s leading businessmen, the famed investor found time to expand on his impressions. “I’m just astounded,” he said of the five companies in which he now owns an identical 7.4 per cent stake. “They’re all different, and they’re all the same at the same time.”
It is not easy to supply a more informative description of Japan’s trading companies. Each is a globe-spanning corporate empire of baffling diversity, encompassing such disparate activities as apparel design, convenience store retailing and construction.
One thing that all five companies have in common, however, is a focus on commodities trading — a fact that makes their cash flows unusually sensitive to the value of the dollar, as well as to the price of commodities such as minerals, grain and oil.
The foreign currency earnings of the sogo shosha, backed by hard commodities from sources around the world, set the trading groups apart from companies with revenues and costs that depend more heavily on prices in domestic markets. They create multiple ways for Buffett to profit from his investment, even if the trading companies’ vaunted plans to reinvent themselves for a world without fossil fuels do not proceed as planned.
Among the most tantalising is the fact that Buffett has bought shares in companies that earn a portion of their profits in dollars, while funding his purchase with long-term debt denominated in yen.
If the Japanese currency were to depreciate, the dollar value of Berkshire’s outstanding yen-denominated debt would fall. At the same time, the value of the sogo shosha stakes in dollar terms may not decline so much because of their foreign currency earnings. If the value of the debt falls more than the shareholdings, then Buffett could reap a profit even without much change in underlying business performance”
To understand the five Japanese conglomerates and their competitive advantages a little better we turned to this CNBC piece which explains: “Today, Japan’s trading companies derive most of their revenue from non-trade activities. In shifting from import-export to business management, they have built up interests in everything from logistics and real estate to frozen foods and aerospace; newer investments include electric vehicles and renewable energy. Their affiliated brands are fairly ubiquitous in Japan, but what they don’t have in common with some other notable Berkshire stock holdings is powerful global consumer products like Apple or Coca-Cola.
Still, their economic clout makes them underrated players. The shosha and their affiliates represent a large industrial grouping of 5,900 companies and 460,000 workers in over 200 cities around the world, according to the Japan Foreign Trade Council (JFTC), a shosha industry group representing 40 companies and 20 associations. These complex global operations make their business relatively difficult to understand for investors, but they’re also an advantage.
“By getting involved in mutually related businesses in a wide range of areas, from upstream to downstream, shosha gain a bird’s-eye view of the entire business process and provide convenience to customers by providing functions such as finance, information, and logistics where necessary,” said Ryosuke Kawai, general manager of the Research Group at JFTC. “They are able to create new businesses with higher added value.”
“The point is not only that the scope of business is extensive and diverse, but trading companies also play a significant role in the global economy,” says Chika Fukumoto, a trading companies analyst with J.P. Morgan Japan. But some recent tailwinds are fading. Amidst heightened worry around a global economic slowdown, the trading companies ability to maintain and improve capital efficiency won’t necessarily come from higher commodity prices and a weaker yen, and to enhance shareholder return, Fukumoto says, “enhancing the quality of their portfolios would be the key determinant for longer-term share price.””
The CNBC piece then goes on detail the extensive business activities of Sumitomo. Mitsui, Mitsubishi, Itochu and Marubeni.
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
