Idea Brunch with James Halse of Senjin Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview James “Jamie” Halse!
Jamie is currently the chief investment officer of Senjin Capital, a Sydney-based fund manager focused on shareholder activism in the Japanese equity markets. Before co-founding Senjin in June 2024, Jamie managed $1 billion across two long/short funds - global brands and Japan at Platinum Asset Management, where he worked for 13 years. Jamie is active as @JamieHalse on X and on LinkedIn. Senjin Capital publishes a monthly newsletter and provides case study analyses and other insights at senjincap.com/news-insights/
Jamie, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, your passion for Japanese stocks, and why you decided to launch Senjin Capital?
My journey really started when my father handed me Rich Dad, Poor Dad when I was 18 or so. I am from New Zealand, and the government provided an interest-free student loan to fund university fees, but also a weekly amount for living costs. I was living at home, so my costs were low. I saved my living cost amount rather than blowing it over the bar like many others did, and looked for investment opportunities where I could deploy this “free” money.
I had not executed anything, but had the fortune to sit down in a criminal law lecture one day next to Lyall Taylor (@lt3000Lyall on X). He now runs his own very successful global equities fund out of Singapore. We got talking and it turned out he had done the same thing with his student loan. He was investing in stocks, and suggested I read Peter Lynch’s One Up on Wall Street. From there I was hooked.
Over the next few years, while investing in NZ and Aussie small & micro-cap stocks, I devoured a library-full of books on investing, markets, financial history, and finance theory. Long daily discussions with Lyall, which we loved but which bored everyone else at law school to tears, rounded out my financial education. I studied law and politics, so the reading and discussions were crucial providing the foundation for me to later move into the investment industry.
I moved to Sydney in 2008 for a buyside job with CP2, which was predominantly an infrastructure manager across public and private assets. This gave me a great grounding in modelling, and in understanding both public and private asset markets, which has been a major advantage relative to the standard equities person. In 2011 landed a role with Platinum Asset Management, which at the time was probably Australia’s most successful fund manager, with ~$30bn AUM. The key founder, Kerr Neilson, was arguably Australia’s most famous investor, and I had avidly read his quarterly reports from about 2005 onwards.
Platinum was a global contrarian fund manager with a value bent, which meant they were nearly always very overweight Japan. They liked to set up targeted funds where they saw an opportunity – rather than where they saw investor demand (which tends to chase performance which is sub-optimal if you are looking for the best returns). This meant that in the late 90’s they set up a technology fund with the stated purpose of shorting the TMT bubble (and totally shot the lights out), but they also set up a Japan fund which I believe managed around $3bn at its peak.
A year or two after I joined, the Japan fund manager took me under his wing and encouraged me to spend more time on Japanese stocks. He (Jacob Mitchell) later founded his own global equities shop, Antipodes Partners, and now manages around $20bn.
He was always trying to get analysts to do work on Japan, but because of the added difficulty – poor IR, limited English disclosure, translated calls etc he struggled with that. I had some history with Japan, so was more willing than most to get on board.
At high school I took Japanese as a subject, and did a homestay in Takasaki – around an hour on the Shinkansen north of Tokyo, and attended the local high school for a couple of weeks. I also studied some Japanese history at both high school and university. So I had more understanding of the culture and historical context than most. I am still in touch with my host family, and took my family to meet them in January this year (after a week skiing amazing powder in Niseko first of course!).
There were incredible value opportunities in Japanese stocks almost everywhere back then, but if I pitched something trading on 10x P/E with half its market cap in cash, the feedback was always “You can’t value the cash, because you’ll never see it. You need something that’s going to grow earnings better than the market expects.”
This made little sense to me, as why would I value future earnings (ie: future cash) if I can’t value actual cash on the balance sheet!
The practical reason was that stock prices responded to earnings, and the market ignored the asset side. These stocks were nearly all classic value traps, because the management did not care at all about the share price, and hoarded cash while having a low payout ratio. Buybacks were unheard of.
Around 2015/16 I started seeing some headlines about shareholder activists doing things in Japan. I had for a long time been attracted to the idea of shareholder activism, because of how as an activist you can be directly involved in generating the return, creating your own catalyst to realise latent value. Whereas traditional active management is really quite passive outside of the buy/sell decisions. I had read about Icahn, Peltz, Dan Loeb, and the Michael Milken junk-bond fueled 1980s wave of corporate raiders/activists, and the approach just seemed like a better mousetrap to me, unlocking obvious value, rather than trying to guess where earnings will be in 3-5 years, while guessing where the market thinks they will be, and then what multiple the market will put on those earnings.
I did not think this activism was possible in Japan, as I had always been told that Japanese management teams do not have to listen to shareholders. Seeing the headlines around Oasis with Nintendo and Dan Loeb with Fanuc made me realise I was probably missing something. So, I did a deep dive into the history of shareholder activism in Japan, the legal basis for the corporate governance framework in Japan, and the corporate governance reform program that was part of Abenomics – starting with the Stewardship Code in 2014 and Corporate Governance code in 2015.
I pitched the idea of a dedicated Japan activist fund to my bosses at Platinum. Partly because I saw a great opportunity, and partly because I wanted a promotion to portfolio manager! To get promoted back then, a PM of a fund either needed to leave or you had to create a new product.
The idea did not get up. Platinum was not an activist, and I was just an analyst. Jacob leaving to found Antipodes (I almost joined him), kicked off an internal restructuring at Platinum, which eventually culminated in my being given a global fund to run in 2017. I focused on that rather than Japan until 2021, when the Japan fund was added to my remit – partly because of my pitch back in 2016.
I quickly saw that the opportunity in Japan for activism had become even better. Stocks were still very cheap, but the environment had evolved to become even more fertile for activism. You could do things as an activist in 2021/2022 that you could not do back in 2016.
I had a mandate to engage a lot more actively in Japan than was Platinum’s traditional style, but I quickly realised that we were not set up to do activism properly. We needed a dedicated fund with its own team, operating under a different philosophy. By 2023 I had recruited a co-PM for the Japan fund, and had approval and budget to establish a dedicated concentrated activist strategy. My plan was to give up the global fund as well as half of the Japan fund, and focus on this new product. The return opportunity was so obvious to me, that I had no doubt it would be highly successful.
A key aspect of setting up was paying a global search firm a ridiculous amount of money to find the perfect Japanese person to help me with the strategy. He (Tsubasa (Toby) Umezaki) is now my co-founder, and is a total unicorn. I had a page-long list of experiences/attributes that I was looking for that I gave the search firm, but had limited hope of ticking off even a third of them. Toby satisfied the vast majority, and is a great guy to boot – super smart, humble, and very high EQ, while still being very willing to disagree and put forward his own view.
Unfortunately, Platinum went through tough times, the CEO stepped down and cut all new projects in advance of a new CEO starting, so Toby was never able to join.
We both really believed in the activist strategy we had put together though, so we resolved to do it anyway!
I finished with Platinum in March 2024, and established Senjin Capital in June, with Toby joining shorly after.
The Nikkei 225 index in Japan is up ~70% over the last year and up ~140% over the last five years. Are Japanese stocks still undervalued? Now that many companies are already adopting shareholder-friendly stances, is your activism still needed?
Our fund has returned around 55% net of fees in yen terms over the period, which is great – and above the broader cap-weighted TOPIX index, but the Nikkei (which is price-weighted, like the Dow) has been absolutely crazy. We of course have very different exposures, focused on small/micro-cap stocks where much of the company’s value derives from its cash and real estate holdings, and relatively low correlation to the index (observed equity betas of 0.3x-0.5x).
I would not encourage investors to allocate to the general Japanese equity market at this point, and definitely not via an index fund. The large cap stocks have run hard, most recently on the AI boom, but before that on the normalization of interest rates resulting in massively expanded margins for the financials, and also the reforms to the defense industry. Return concentration has hit peak levels, and has potentially begun to unwind (NAND memory stock Kioxia is down almost 40% from its peak). Depending on your views on AI, there may be opportunities in the SAAS and IT services sectors
The story I was pitching to investors when running Platinum’s Japan fund (eg: https://www.livewiremarkets.com/wires/how-japan-regained-its-mojo ) has also played out well in the large cap space – the corporate governance reform has had a big impact. Companies have massively increased dividend and buybacks, adopted RoE targets, and are increasingly willing to follow Hitachi’s lead and undertake major restructuring. In many cases, investors have positioned ahead of planned restructuring actually delivering tangible results. This is a big shift from the 2010s - Hitachi was restructuring for the better part of a decade from 2009 before its stock really started to work.
Money has flowed into activist/engagement funds, with around US$100bn invested in the space now. However, this is concentrated in the biggest five or six activists, which together manage probably $60-$70bn or more.
In the small/micro-cap space it is a different story, with corporate governance reform still in the early innings. Small/micro caps are the lion’s share of Japan’s listed companies, with something like 2,000 companies having a market cap smaller than US$300m. The big guys can’t really play in that area anymore due to size constraints.
We still regularly find companies with solid businesses that have half the market cap or more in cash, plus often a tonne of real estate that doesn’t show in the accounts as it is held at historic cost.
You have said Senjin intends to raise equity-based compensation in its engagements after examining Kioxia’s option program. What would a well-designed Japanese equity-incentive plan look like? Who should participate, which performance metrics should be used, and how do you prevent short-term share-price engineering?
A good incentive plan gives managers in a position to affect outcomes real skin in the game. Most Japanese equity programs are token and do not really affect behaviour. Kioxia was different, because Bain Capital put the plan in place. That plan has now minted hundreds of new multi-millionaires.
Short term share price engineering is a problem in the US, where CEOs design the strategy based on their KPIs. If the KPI is EPS growth, expect a tonne of debt-funded acquisitions. If it is ROIC, expect a lot of cost cutting and stretched payables. Japan is so far away from this being a problem, that I would not worry about it.
You could say that undertaking a buyback of 20-30% of your stock is short-term engineering, but is it really? If you have ample cash to carry that out, your stock is cheap, and you don’t have other fantastic investment opportunities, that’s actually great capital allocation.
There is some handwringing in some quarters in Japan about the lack of focus on growth as companies allocate cash to dividends and buybacks, but this overlooks the fact that the company that currently has the cash does not need to be the one that invests in growth. In a well-functioning capital market, cash paid out to investors is ultimately reinvested where capital is demanded. That is how the US’ startup ecosystem works. It is not IBM and General Motors that have driven the last 20 years of economic growth in the US, it is Amazon, Google, Salesforce et al.
How does shareholder activism in Japan differ from activism in other markets? What have you found works well? What doesn’t?
There are a bunch of differences in Japan that can make activism more difficult in some ways, but also easier in others.
Directors in Japan owe no duty to shareholders, only to some imaginary idea of “the company” – which is supposedly a collection of stakeholders such as customers, employees, suppliers, and somewhere down the list, shareholders. Courts give a high degree of deference to directors’ business judgment, meaning legal challenges are near impossible.
Many shareholders do not exercise their AGM votes based on the prospects for their equity investment, but rather based on historical business relationships.
Countering these factors, such “cross” shareholdings are in decline, opening up more of the market to shareholder influence. An investor can buy up to 30% of a company on market without launching a tender offer to all shareholders. If a tender offer is launched, it can be for any amount of the company – there is no requirement to bid for 100%. Poison pill takeover defenses must be approved by a shareholder vote. Shareholders can submit binding proposals to the AGM on almost any topic – shareholders’ legal rights to govern public companies are probably stronger in Japan than anywhere, the issue is cross-shareholdings and traditional corporate culture.
We have studies hundreds of cases of activism in Japan, and synthesised what we believe is the optimal approach.
That is, we constructively and politely engage with management on all areas where we see the company can improve, ranging from the obvious capital allocation decisions through to the potential for operational and/or business portfolio restructuring, and growth options. This culminates with submitting a draft strategic plan to the company that we would like to see implemented.
If the company gets on board with serious reform, then the stock will do very well. The easiest win is increasing the dividend payout ratio. Typically you see payouts around 30%, and stocks trade on a ~4% yield. If the ratio goes to 60% or more, then the stock should generally double.
Operational restructuring requires a lot more heavy lifting, and difficult internal decisions that run completely counter to the corporate culture. If a company gets religion on this, then that is fantastic, but it is not a high probability outcome.
If we can generate most of the upside we see in the stock in a reasonable timeframe from changed capital policies, then we will generally be happy to exit.
If the company is unwilling to change, then we will use the rights attached to our shares to see the latent value unlocked. A fully friendly approach does not work, as it has no teeth. However, we will always be polite and constructive, even when escalating things. Being publicly aggressive and arrogant can cause a lot of issues in Japan that can hurt an engagement – including increasing the likelihood of being hit with a poison pill.
Which investors and management teams in Japan do you admire the most?
One has to admire the Murakami family’s ability to generate amazing returns. Yoshiaki Murakami was basically the OG activist fund manager in the early 2000s. He later relocated to Singapore, and they now run their money as a family office. They are amongst the most aggressive activists in Japan, and are the exception to my rule above. When you have scale and unconstrained capital, the rules that apply to you are different.
Other investors I admire are Seth Fischer at Oasis – he has had fantastic success, and now manages >US$15bn. I invested alongside him a lot with the Platinum Japan Fund in stocks like Sun Corporation – where he was able to engineer the Nasdaq IPO of its subsidiary Cellebrite, and Fujitec where he was able to replace the board of directors. Also Kanya Hasegawa of 3D Investment Partners – I was invested alongside them in Fuji Soft to the great benefit of Platinum’s investors, and they have also had great success with Sapporo. Like us, they like companies with heavy real estate exposures.
To some extent, I believe these managers will become a victim of their own success. The law of large numbers means their future returns are highly unlikely to match their past returns. Oasis’ investment in Kao (which I wrote about here: https://senjincap.com/larger-activists-larger-targets-new-tactics-similar-returns-oasis-v-kao/ ) may be an example of this dynamic. That said, I would still rather be investing with them than a US-focused activist. There is just much more low-hanging fruit in Japan.
Managers I admire include Issei Ainoura, who is CEO of GMO Payment Gateway. He has set up a highly structured sales-driven culture that is rare in Japan. Similarly, Masaru Tange of Shift Inc has set up a strong growth organization with a highly coherent strategy targeting an inefficient industry.
Most executives in Japan get to their positions by not making mistakes rather than through taking smart risks. They don’t really understand why the share price is important other than because the Tokyo Stock Exchange told them it is. They refuse to make hard decisions to improve the bottom line, because maintaining internal harmony is viewed as much more important than making money or contributing to the productivity of the economy. So when you do meet a manager who really gets it, it tends to stick with you.
Jamie, what are some of the first things you do when researching a potential investment? What does that first hour of research look like for you? Do you do anything that few others do?
We are very process driven, to the extent that we have a six-page word document outlining our process steps. Our shortlist of potential investments comes from our proprietary database, which we built out with a lot of grunt work to identify the cheapest stocks – including uncovering hidden real estate assets.
We do a review of the companies on the shortlist to ensure there are no buried landmines and to establish the quality of the underlying businesses, and then produce a shorter shortlist from there which we work through in sequence.
Identifying cheap companies is not rocket science as our approach is quite asset based. We simply value the balance sheet at market values, and run a model to determine what a PE fund might pay to buy the business. That is our upside case.
We are probably more willing to take on liquidity risk than most others, as we are confident in our ability to generate an exit or other strong outcome, due to having a flexible approach that is not constrained by our investor base.