Inside Investor Relations - Volume 24 - Foreign institutional investor series – Nikko Asset Management
Source : Nikko Asset Management
For any listed company and its IRO, knowing who the investors are, their investment strategies and styles are crucial for investors targeting or preparing for an effective investor meeting. In our previous volume we introduced Schroders, Franklin Templeton Investments and in this volume of Inside Investor Relations we will introduce another international investment company- Nikko Asset Management.
In April 1999, Nikko Securities Investment Trust and Management and Nikko International Capital Management merged and became Nikko Asset Management (Nikko AM). After acquired Tyndall Investments (an Australian fund management company), DBS Asset Management (a subsidiary of DBS Bank) and Treasury Asia Asset Management(an Asia-Pacific boutique investment company), Nikko has offices in 11 countries across Europe, the US, and Asia Pacific, and has 908 employees with 28 nationalities globally. Asset under management at Nikko AM totaled US$284.4 billion as of Dec 31, 2020. In Taiwan, Nikko AM invested in 108 companies with a total value of US$ 600mn.
Nikko’s Investment Philosophy
According to Nikko’s corporate website, Nikko believes that Asian markets are inefficient and individual stocks are prone to periodic mispricing. The investment process is driven by the belief that active management, based on thorough fundamental research of companies, can take advantage of this inefficiency to deliver strong returns over the longer term — if this process is consistently executed in a team-based environment. All stocks in each portfolio reflect their conviction in the need to find sustainability of returns and/or positive fundamental change.
Investment Process
In order the construct the best investment portfolios, Nikko’s investment process can be summarized into five steps:
- Opportunity set definition: the investible universe is defined by applying market capitalization limits and liquidity screens to stocks listed in Asia ex-Japan markets.
- Ongoing risk monitoring & management: risk control involves daily portfolio risk management processes managed by independent risk teams spanning four functions, namely Investment Management, Risk Management, Investment Compliance and Enterprise Risk Management.
- Idea generation: all team members attend structured weekly meetings to discuss generating new stock ideas.
- Detailed fundamental research: from idea generation, stocks are selected for further detailed fundamental analysis including Environmental, Social and Governance (ESG) assessment, and subsequently presented by the sector analyst to the team for discussion and a collective final stock rating.
- Portfolio construction & macro overlay: portfolio construction includes the buying and selling of stocks based on the internal ranking system. An independent macro assessment is used to cross check country allocations resulting from bottom-up stock selection. This is to identify unintended risks and help avoid undue geo-political uncertainties.
ESG Implementation
Acceptable ESG is a prerequisite for investment in a company but it is not the sole determinant. Other considerations include the sustainability of a company's returns/profitability, fundamental positive changes, financial indicators, quality of management, and valuation. However, where negative ESG issues are identified in the investment process, with little or no evidence that corrective measures are being taken, the company is excluded from investment consideration regardless of its strength in other areas.The Asian Equity (ex. Japan) team incorporates ESG across various stages of the investment process:
Idea Generation: Screening flags, third-party data support
Nikko assess ESG risks of companies during the stock selection process. All known companies with negative ESG issues are flagged in the research database and are considered ineligible for investment unless the company has shown tangible efforts to improve. Analysts continually evaluate companies, and these firms' behaviour towards ESG issues are updated in the database as appropriate. Nikko also use third party data providers' scoring and analytics tools.
Fundamental Analysis: Integrated research process and relative scoring on ESG factors
A key part of fundamental analysis toolkit is the integration of ESG materiality assessments. This helps us to build the case for the sustainability of earnings and risk mitigation, and it allows us to identify industries or companies undergoing positive fundamental change. ESG is not the only determining factor of investments but it can be an important consideration. ESG assessment — corporate governance factors, in particular — has been an integral part of investment process since its inception over 10 years ago.
Nikko actively research and score companies based on ESG factors relative to their peer group. Nikko believe that a company's corporate governance framework must promote timely, accurate, and transparent disclosure of important information, giving a complete picture of the company's performance and prospects. An assessment of the beneficial ownership track record here is key across all investments.
Portfolio Construction & Risk Management: Sell Discipline
The rating of a company can be downgraded to SELL1 or SELL2 for negative ESG developments, depending on the severity of the issue. The independent risk team also performs checks on low ESG ranked and downgraded stocks.
Nikko’ Exposure in Taiwan
Nikkos’ investment team that has a direct investment responsibility in Taiwan is mainly based in Japan, Singapore and Europe. According to our research, as of December 31,2020, Nikko has invested in 108 listed companies in Taiwan, with a total investment of approximately US$ 600 million. The top five Taiwan-listed companies with the highest investment value are Taiwan Semiconductor (2330 TT), HIWIN (2049 TT), AirTac (1590 TT), MediaTek (2454 TT), and Hon Hai (2317 TT). Among them, there are some companies such as TSC Auto ID Technology (3611 TT) and QST International (8349 TT), Nikko is the largest foreign institutional shareholder. Also Nikko was listed as top 5 foreign institutional shareholders in HIWIN (2049 TT) and Visual Photonics Epitaxy (2455 TT).
Source: QIC Research
Source: QIC Research
Among all Nikko’s funds, Nikko Asset Overseas E.M. Equity Index MSCI Emerging Mother Fund is one of the funds that holds the largest numbers of Taiwanese equities. This US$ 1,250mn AUM fund invested 12.73% in Taiwan, and has Taiwan Semiconductor (2330 TT) as its largest holding (5.8%) as of Dec 31, 2020.
QIC advisors consist of experienced professionals that have worked in major sell-side and buy-side companies. Leveraging our knowledge in industries and relationships with investors, we assist companies and investors to achieve effective two-way communication to enhance shareholder value. QIC also supports our clients with our many years of experience in corporate access services. We plan, schedule and execute tailor-made roadshows and targeted investor events for high-quality corporate clients. If you are interested in learning more about Nikko AM or our services, you are welcome to contact us.
Contact: yvonnehuang@qtumic.com