(Bloomberg) -- Japan's multiyear efforts to improve corporate governance have created a greater gap between good and bad companies.
That's the view of Zuhair Khan, who launched a long-short fund at Union Bancaire Privee in July 2020 to capitalize on this divergence. The $100 million U Access Long/Short Japan Corporate Governance fund has made an annualized return of 11% since inception, he said.
The “comply or explain” nature of the nation's corporate governance code introduced by Prime Minister Shinzo Abe in 2015 means it's not mandatory and carries no fines for noncompliance, Khan explained. While some firms have made big improvements, helped in part by pressure from activists and other investors, there is still a long way to go.
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“The good governance companies are actually getting better and better, at a pretty fast pace,” he said in a video interview from Tokyo. The bad companies are “improving in a more superficial manner, but not in terms of real change.”
Japan has seen some corporate governance success stories in recent years, such as the dramatic turnaround in profitability at Sony Group Corp. While activists continue to help effect change -- such as their involvement in recent moves at Toshiba Corp. -- Khan expects little additional government pressure under the new administration led by Prime Minister Fumio Kishida, who was widely seen as a continuity choice.
Khan says his fund has been performing better than he anticipated thanks in part to share-price distortions triggered by the coronavirus pandemic. He aims to grow the market-neutral vehicle to about $2 billion, possibly in the next one or two years, and targets a return of 8% per year regardless of the benchmark Topix's performance.
The fund holds long positions in 30 companies that Khan has evaluated as having good governance while also being undervalued, and short positions in about 60 richly valued businesses with poor oversight. He estimates the mispricing between his long and short bets will take “several years” to narrow, enabling sufficient returns.
“Things will change, but at a slow pace,” Khan said. “There's plenty of alpha for us to generate.”
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