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The upside of Japan’s corporate governance revolution

A wave of governance-driven reform is sweeping through Japan, bringing with it a much tighter focus on shareholder-friendly practices and corporate responsibility, according to Fidelity Portfolio Manager Jed Weiss, who believes crucial changes in Japan’s Corporate Governance Code will yield some promising investment opportunities.

“Historically, Japanese corporate culture has not always prioritized alignment of management and shareholder interests as highly as in the U.S. or Europe, nor has it placed a lot of emphasis on board accountability and independence,” explains Weiss, who manages Fidelity® International Small Cap Opportunities Fund (FSCOX). “This has often led to suboptimal outcomes for investors, so recent changes to the contrary are most welcome.”

In helming the diversified international equity strategy since 2008, Weiss favors small- and mid-cap growth companies with multiyear structural growth prospects, high barriers to entry and an attractive valuation. In particular, he focuses on cyclically out-of-favor businesses with pricing power and limited competition, as well as firms exhibiting strong earnings potential and a share price that has fallen due to macroeconomic or other events.

Weiss sees evidence of the corporate culture shift in Japan reshaping the investment landscape for smaller-cap equities, which suffered for about two decades from a prolonged bear market following the market’s peak in 1990.

As an example, he notes that some Japanese firms with limited histories of distributing surplus capital to shareholders have implemented significant stock-buyback programs, including THK, a leading mechanical engineering, robotics and automation company in the MSCI EAFE Small Cap Index. It plans to repurchase 20 million of its shares, representing roughly 16% of its issuance at time of the firm’s announcement in late 2024.

Weiss believes that recent reform has yielded a number of positive changes. Take Fujitec, a fund holding as of November 30 that has been closely managed by a founding family that owned a sizable stake in the company and had a history of making business decisions that weren’t always in the best interests of most shareholders.

“Then, in 2023, an activist investor successfully implemented changes to the firm’s board composition, leading to significant improvement in its governance and capital allocation practices,” contends Weiss. “The result? An improved balance sheet, a higher profit margin and a subsequent rally in the stock.”

Weiss points to another critical change stemming from updates to Japan’s Corporate Governance Code: the unwinding of cross-shareholdings among numerous Japanese corporations.

This reduction in the number of publicly traded companies holding shares in other publicly traded firms frees up cash for businesses to either buy back their own stock and/or pursue other shareholder-friendly activities, a potential game-changer, in his view.

“Despite these promising developments, the fund has remained significantly underweight Japanese small- and mid-caps, although Japan represents the single-largest geographic exposure within the portfolio and its benchmark,” Weiss says. “However, I am eager to capitalize on reform-driven investment opportunities as they arise.”

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Jed Weiss
Jed Weiss
Portfolio Manager

Jed Weiss is a portfolio manager in the Equity division at Fidelity Investments.

In this role, Mr. Weiss manages Fidelity Series International Growth Fund, Fidelity Series International Small Cap Fund, Fidelity International Small Cap Opportunities Fund, Fidelity Advisor International Small Cap Opportunities Fund, Fidelity International Growth Fund, and Fidelity Advisor International Growth Fund. Additionally, he co-manages Fidelity Total International Equity Fund and Fidelity Advisor Total International Equity Fund.

Prior to assuming his current position in 2007, Mr. Weiss covered the telecommunications, health care, and consumer sectors as an analyst on Fidelity’s Global Emerging Markets team. Previously, he worked as an analyst and portfolio manager of Select Environment Fund, during which he also covered a wide range of industries within the cyclical sector. Prior to that, Mr. Weiss held various other roles at Fidelity, including equity research analyst covering communications, semiconductors, and networking stocks, during which he also managed Select Networking and Infrastructure Portfolio. Additionally, he worked as an equity research analyst covering semiconductors and as an associate analyst covering U.S. regional banks.

Before joining Fidelity in 1997, Mr. Weiss was a summer associate at Goldman Sachs and a legislative affairs intern at the White House. He has been in the financial industry since 1997.

Mr. Weiss earned his bachelor of arts degree in government from Harvard University, where he graduated Phi Beta Kappa.

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