Summer 2022 Letter
7,200 Years Old Cedar
Right before returning to Shanghai (Read: Happy Quarantine’s Day) in 2020, I had an opportunity to visit Yaku Island in Japan. The island sits off the southern coast of Kyushu Island and her unique remnant of warm/temperate ancient forest has been a natural World Heritage Site since 1993, especially known for very old Japanese cedar trees. When I said “old”, they are very old. Generally speaking, the longest lifespan of a cedar tree is 500 years. The island has at least 15 cedar trees older than 1,000 years old and the oldest one is estimated at 7,200 years old. The island’s particular vegetation inspired Hayao Miyazaki in his creation of “Princess Mononoke”.
Yaku Cedar
It was the pandemic year when everybody began to realize the fragility of life; the news media reported a rapidly rising death toll every day everywhere in the world. Confronted by mortality in the face of the pandemic, this island gave me an opportunity to rethink life and the subject of longevity.
Nurse Log
However, Yaku Island’s exceptional ecosystem is not the result of rich soil and a calm climate. The central part of the island consists of granite and is covered by volcanic ash; thus very few nutrients are needed for plants to grow. It also means a rough environment with poor drainage and water absorption. At the same time, the island’s humid subtropical climate and unusually steep terrain result in extremely heavy precipitation, 4,000-10,000 mm a year, one of the world’s highest. The locals say “Yaku Island rains 35 days a month.” Consequently, landslides occur very frequently.
You might expect that these poor conditions have a negative effect on the forest formation, but as a matter of fact, the combination of these extreme conditions helped the island to build her ecosystem. Due to the poor nutrient, Yaku Cedar grows slowly. At 500 years old, Yaku Cedar is only 40cm in diameter. At 1500 years old, it will be 180cm. The high rainfall and high humidity help the tree to secrete resin, which protects the living trees from disease in the heavy rainfall environment and effectively preserves the wood from decay.
After a typhoon, when one tree falls on another, its roots can grow around what may appear to be a single trunk under the moss, and more trees can grow on top of dead stumps. This phenomenon is called nurse logging, which is very rare in the Northern Hemisphere’s temperate area. A nurse log is a fallen tree that, as it decays, provides ecological facilitation to seedlings. In a developed forest with many trees, seeding is often inhibited because of insufficient sunshine due to weeds on the floor.
Endowment Approach
Yaku Island’s sustainable ecosystem is similar to the endowment approach. We build long-term relationships with our investment managers. As of June 30, 2022, we have 54 relationships (28 public and 26 private) with an average relationship of 7.6 years. We also have 18 managers with whom we have more than 10 years of relationship. Longevity is not the only goal we have, but we are fortunate that we are able to identify and build long-term relationships with our investment managers.
We learned from our mistakes as well. Not all relationships were as successful as we hoped, however, we learned tremendously from the experiences and, like the nurse log, such experiences became foundations for longer and more successful relationships. In order for us to survive the financial and economic storms like the one we are experiencing; we need to build and master our own ecosystem. Our friend, Dennis Hong, calls it “ecosystem control” and describes it brilliantly in his Q2 2018 letter:
Does the Business Control its Ecosystem?
Investors and business analysts typically describe this “lock-in” phenomenon as “business quality” or “competitive advantage,” highlighting characteristics like “barriers to entry,” “switching costs,” “network effects,” and “brand loyalty” to prove their point. In our opinion, there is a much simpler way to think about competitive advantage and business quality. When analyzing a business, we often ask one question: does the business control its ecosystem? We find that focusing on this particular question first in our research process eliminates potential investments much more quickly than analyzing each individual aspect of a company or expending time debating the degrees of entry barriers or brand equity. For a business seeking to secure its position in the market, it is all about ecosystem control. In hindsight, it is not difficult to identify a business like Microsoft or Apple which have both clearly controlled their respective ecosystems for decades, but the more interesting question is: how does a business, such as a startup, establish and increase its ecosystem control?
So, how do we control our own ecosystem?
Ecosystem Control
To be honest, it’s not very difficult to start a multifamily office. In Singapore, we see many new single and multifamily offices being established. Just in the first four months of 2022, the Monetary Authority of Singapore (MAS) approved more than 100 applications to set up family offices on the tropical island. However, it is not very easy to manage and operate them successfully in the long term. Many family offices failed not because they didn’t know how to manage their investment portfolios. Instead, they failed because they didn’t know how to manage the expectations of their own customers, i.e. families. When I was in Hong Kong, I had a lengthy discussion with my friend, who happened to be the 4th generation of the family. She is a part of the family’s asset management arm and faces a lot of challenges to meet the expectations of her family members. She said the total number of family members is already more than 100, including her great-grandmother at the age of 100 (the following table shows a hypothetical number of five-generation family members). Everybody has different expectations and each generation has a very different perspective on how to manage the family’s portfolio. The family’s wealth is quite large in the absolute figure, but it is not large enough to support the lifestyle of 100 people without jobs. At the same time, it is inefficient to manage portfolios separately. As a result, they are making a lot of efforts on communication and education every year. Our business is not like this Hong Kong family, but it will become an inevitable challenge, in the long run, therefore we decided to take action early before it is too late. Our answer to this question is investment education for our own family members.
Hypothetical Number of Family Members
Investor Education
Since the start, investment education has been at the core of our business. In 2020, together with Pumeng Asset Management in Shanghai, we brought Mr. Ted Seides' Capital Allocators to China and created a community for GPs and LPs to advocate the best practice of asset management (only in Chinese). In 2022, we helped Ted’s new book Capital Allocators to be published in China. A copy of the book is enclosed with this letter.
In 2018, we also launched Generation Z Investment Club, the first and only intercollegiate investment club in Asia, to facilitate investment education for our next generation. We also launched Next Gen ESG Investing Program in Singapore with the support of the CFA Institute and local asset management companies. In 2021, Next Gen Investors Endowment was established with a $200,000 initial endowment fund from my family. We are pleased to share the first Impact Report of Next Gen Investors Endowment. Please follow the link to download. (link)
Finally, in 2021, Gen Z Group, our affiliate company in Singapore, released our flagship investor, INVEST!. This new investment webtoon is based on the million-seller Japanese investment manga Investor Z but reproduced by China's leading manga artist, Revolver, who has more than 5 million social media followers. We are adapting China's culture and investment landscape with the collaboration of China's leading investors and publicly listed companies. For the first 40 chapters, the investor already received more than 15 million views globally.
Conclusion
After 3 months of the lockdown, Shanghai is coming back to normalcy. It’s been almost two years without any overseas trips, the longest time I’m staying in the same country since I was 13 years old. Finally, I am planning to visit Singapore in August and London in September. Hope to see some of the readers of this letter in person very soon.
Yours respectfully,
Shinya Deguchi