Zuhair Khan achieved some recognition in Japan over the past few years by ranking poorly governed companies at risk of scandal. Now, he’s looking to see whether the list can make any money as a new hedge fund at Union Bancaire Privee.
The yet-to-be-named long-short fund will seek out about 30 undervalued companies with good governance, while shorting roughly 60 richly valued businesses with weak oversight, said Khan, who recently left his position as head of research at Jefferies Japan Ltd. to start the new fund. It will debut by year-end, he said.
It’s essentially a bet that the quality of a company’s governance matters to its share price, a topic that’s been debated by academics over the years. Although Prime Minister Shinzo Abe’s government adopted stewardship and government codes in 2014 and 2015, progress has been steady, but slow.
“Valuations in Japan are very low as future improvements in governance are not priced in, and this creates tremendous upside,” Khan said. “A few years ago, it may not have been possible to have a fund like this.”
Just this week, Kansai Electric Power Co. became the latest high-profile example of weak corporate governance in Japan. Although executives acknowledged receiving 320 million yen ($3 million) in gifts of cash, gold, precious coins and tailored suits from a local official who had sway over its biggest nuclear plant, they deflected blame.
The hedge fund offers a way to bet on effectiveness of corporate governance reforms, unlike the activist approach of buying into firms that are poorly managed and urging them to make changes. ValueAct Capital Management led a board shakeup at Olympus Corp. earlier this year after taking a stake in the camera and endoscope manufacturer.
Other investors are also seeking out opportunities in Japanese stocks. Michael Burry of “The Big Short” said last month that he’s looking for undervalued businesses in the U.S., Japan and South Korea with significant cash or shareholdings. “I want to see evidence that the company is investing to grow the business, buying back stock, paying dividends, or making accretive acquisitions,” Burry said.
Khan identified Nissan Motor Co. as one of the companies with a high risk of scandal on his list at Jefferies, before former Chairman Carlos Ghosn was arrested in November on allegations of failing to disclose more than $140 million in compensation. Ghosn has denied all the charges.
“I looked at the reform efforts from multiple angles and talked to all the players: the government, politicians, regulators and the stock exchange, corporates, allegiant shareholders, domestic passive managers, foreign active managers, hedge funds and of course activist funds,” Khan said. “I combined this with lots of detailed governance data gathering and quantitative analysis.”
Khan said he combined the information to identify which shares were likely to outperform as the companies underwent reforms, as well as those likely to underperform as they resisted change. “These insights are at the core of the new fund strategy that I will manage at UBP,” he said.
Prior to Jefferies, Khan spent most of his career at asset managers, including Eiken Capital, APS Asset Management, UBS Global Asset Management and Citigroup Asset Management. A fluent Japanese speaker, he’s a graduate of the MIT Sloan School of Management and the University of Pennsylvania.
Khan declined to disclose the exact amount of UBP’s hedge fund, adding that he’ll select stocks among the top 500 Topix Index companies, spread across about 12 sectors. Volatility will be at about 4 per cent to 6 per cent, and the fund will target a double-digit return, he said. Reform efforts should push the Topix to 1.8 times book value from its current level of 1.1, according to Khan.
“Given the very low initial level of governance and the high level of allegiant shareholdings in Japan, it will take at least another 10 years for corporate governance reform to fully play out,” he said.