Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Since TSE's request, more companies have used ROE or ROIC as KPIs in mid-term management plans, but even now, more companies only indicate targets for sales, operating profit, etc.</li>
<li>Larger companies have been the first to raise ROE; the key will be for smaller companies, which have been slower to improve their ROE, to raise their ROE.</li>
<li>Many companies have only just begun to reduce their policy shareholdings and strengthen shareholder returns, and are still in the process of addressing the core issue of increasing profit margins.</li>
</ul>


Since TSE's request, more companies have used ROE or ROIC as KPIs in mid-term management plans, but even now, more companies only indicate targets for sales, operating profit, etc.
Larger companies have been the first to raise ROE; the key will be for smaller companies, which have been slower to improve their ROE, to raise their ROE.
Many companies have only just begun to reduce their policy shareholdings and strengthen shareholder returns, and are still in the process of addressing the core issue of increasing profit margins.


The Key to Higher ROE Is Higher Profit Margins and Faster Efforts by Smaller Companies

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

TSE Tokyo Price Index TOPIX / Event-Driven

<ul>
<li>Last year, the GPIF as a whole returned 22.67% in yen terms. As a whole, GPIF outperformed its benchmarks by 0.04% after paying 0.02% in fees and costs.</li>
<li>GPIF traded ¥30trln of assets - relatively high turnover for a fund which espouses very low turnover - but there's a reason for that. There were also sharp active/passive moves.</li>
<li>This year is the last year in the "cycle" of the "old" Policy Allocation Framework. A new one is likely to be introduced this year.</li>
</ul>


Last year, the GPIF as a whole returned 22.67% in yen terms. As a whole, GPIF outperformed its benchmarks by 0.04% after paying 0.02% in fees and costs.
GPIF traded ¥30trln of assets - relatively high turnover for a fund which espouses very low turnover - but there's a reason for that. There were also sharp active/passive moves.
This year is the last year in the "cycle" of the "old" Policy Allocation Framework. A new one is likely to be introduced this year.


Fy23 GPIF Results and Portfolio Changes - Outlook for FY24

<ul>
<li>If a company hasn't improved its return such as ROE, it's difficult to buy its shares until the plan is more certain that cash flow will expand in the future.</li>
<li>Since cash flow margin must be raised to increase cash flow, the ultimate goal is to achieve sales growth while raising the profit margin on sales.</li>
<li>Cutting costs alone isn't enough; cash must be used for investments that will lead to future growth, so cash must be used for growth investments as well as stock repurchases.</li>
</ul>


If a company hasn't improved its return such as ROE, it's difficult to buy its shares until the plan is more certain that cash flow will expand in the future.
Since cash flow margin must be raised to increase cash flow, the ultimate goal is to achieve sales growth while raising the profit margin on sales.
Cutting costs alone isn't enough; cash must be used for investments that will lead to future growth, so cash must be used for growth investments as well as stock repurchases.


Whether Measures to Meet TSE's Request Increased Certainty Will Be Tested at 2Q Financial Reporting

<ul>
<li>The reason why investor engagement is effective is in the exercise of voting rights. Engagement is considered to have been effective around 2014, when foreign ownership exceeded 30%.</li>
<li>Engagement is generally effective in the funds entrusted to GPIF, according to the results of the study. GPIF should raise fees to allow investment managers to engage in fruitful engagement.</li>
<li>This tends to be a generic question for passive funds. If we expect engagement to be more effective in the future, we need to increase the number of active funds.</li>
</ul>


The reason why investor engagement is effective is in the exercise of voting rights. Engagement is considered to have been effective around 2014, when foreign ownership exceeded 30%.
Engagement is generally effective in the funds entrusted to GPIF, according to the results of the study. GPIF should raise fees to allow investment managers to engage in fruitful engagement.
This tends to be a generic question for passive funds. If we expect engagement to be more effective in the future, we need to increase the number of active funds.


The Challenge Is to Raise the Quality of Engagement. To Do So, Active Funds Need to Be Increased

<ul>
<li>The problem with cross-shareholdings is not simply that they weigh heavily on ROE and ROA improvement, but also that they do not create tension in management.</li>
<li>The degree of seriousness of the company's efforts to reduce policy shareholdings is a measure of the improvement in return on capital. The level of seriousness must be monitored.</li>
<li>The fact that there are inappropriate entries in the items required of prime market listed companies indicates that many companies are not suitable for prime market listed companies.</li>
</ul>


The problem with cross-shareholdings is not simply that they weigh heavily on ROE and ROA improvement, but also that they do not create tension in management.
The degree of seriousness of the company's efforts to reduce policy shareholdings is a measure of the improvement in return on capital. The level of seriousness must be monitored.
The fact that there are inappropriate entries in the items required of prime market listed companies indicates that many companies are not suitable for prime market listed companies.


Key to Look Carefully to See if What Is Disclosed Is Consistent with Profitability and Other Results

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

The Key to Higher ROE Is Higher Profit Margins and Faster Efforts by Smaller Companies

I would like to discuss the issues on the June 5 Nikkei Shimbun article, “Buy Companies on the Seriousness of ROIC Management: ROE of 10% within...

Metrical Inc

Fy23 GPIF Results and Portfolio Changes - Outlook for FY24

The GPIF reported its portfolio makeup Friday. Dom Bonds and Foreign Equities see ACTIVE weights up on outperformance. Allocs still middle of range...

Travis Lundy

Whether Measures to Meet TSE's Request Increased Certainty Will Be Tested at 2Q Financial Reporting

I would like to discuss the issues on the May 31 Nikkei article titled “Management Plan: ‘Both Profit and Capital Efficiency’: Screening Eyes on...

Metrical Inc

The Challenge Is to Raise the Quality of Engagement. To Do So, Active Funds Need to Be Increased

I would like to discuss the issues on the May 21 Nikkei article, “GPIF verifies 6% increase in market capitalization through dialogue between...

Metrical Inc

Key to Look Carefully to See if What Is Disclosed Is Consistent with Profitability and Other Results

As for the May 27 Nikkei article, "FSA to Investigate Appropriate Disclosure of Policy Shareholdings, Targeting All Listed Companies",

Metrical Inc