Brandes Investment Partners Equity Strategy Notes Third Quarter 2019 (July 1 – September 30, 2019)

The Brandes Japan Equity Strategy rose 1.5% (gross of fees), underperforming its benchmark, the MSCI Japan Index, which gained 3.1% in the third quarter.

Positive Contributors Commercial printing company and electronic and entertainment manufacturer JVC Kenwood helped performance, appreciating over 20% each.

Other contributors included Torii Pharmaceutical, semiconductor manufacturing equipment firm NuFlare Technology, food company Calbee and residential appliance manufacturer Chofu Seisakusho.

Performance Detractors The most significant detractors were auto-related holdings, namely automaker Motor and auto-component companies Nippon Seiki and Tachi-S.

Broadcaster Fuji Media also hurt performance, as did diamond tool manufacturer Asahi Diamond Industrial.

Select Activity in the Quarter The investment committee took advantage of the fairly volatile market by deploying capital during the weak month of August and reducing positions throughout the market recovery in late September. Cash, which had been on the high end of historical range over the past few years, was lower at quarter end (at about 3% of the portfolio) as we initiated positions in Miraca Holdings and Nitto Denko, and added to our holdings in Takeda Pharmaceuticals, Taisho Holdings and Mitsubishi Tanabe Pharma. While these three names have contributed significantly to the portfolio’s underperformance over the past year, the investment committee remains confident in their long-term upside potential given their attractive margins of safety.

Amid the market rebound in September, we pared our positions in companies that have performed strongly, namely Dai Nippon Printing, NuFlare Technology and Torii Pharmaceutical. Additionally, we exited our position in Hibiya Engineering.

New Buys Unlike many of our other holdings, Miraca Holdings and Nitto Denko trade at slight premiums to book value (as of September 30). However, the investment committee believes both companies offer compelling value propositions based on the long-term view that they can generate excess returns over their costs of capital as their businesses normalize.

Miraca Holdings is one of the largest clinical laboratory testing companies in Japan, where it shares market leadership with BML, Inc. Miraca is currently undergoing a substantive capital expenditure program for the construction of a state-of-the-art clinical laboratory service center. Projected to cost up to 75 billion yen or nearly half of Miraca’s market cap, the initiative is expected to result in large cost savings and improved productivity. Management anticipates the new service center to be fully operational by 2022.

Miraca has also been investing in its existing business to promote growth. While near-term earnings are expected to struggle, we believe that once the capital investment programs are completed, the company will be able to reap the economic benefits and start to grow both revenues and profits. We take comfort in the company’s solid balance sheet, which should enable it to fund such large-scale projects. In our view, investments in companies such as Miraca, which is faced with what we consider near-term issues but offers appealing value potential, highlight the advantage of our patient, long-term-focused investment style.

Nitto Denko is a specialty chemical company that manufactures tapes and film products for various uses, including in housing equipment, electronic devices, consumer and personal care products, as well as medical and auto equipment. Despite near-term concern related to slowing smartphone demand, which is one of the company’s major revenue drivers, our analysis

shows Nitto Denko has a long track record of strong research and development, a diverse customer base and a well-executed strategy to target niche end markets. As such, we believe the company remains well positioned to deliver attractive returns on capital. In our opinion, the market is not giving enough credit for the company’s long-term growth prospects. At its current valuations, Nitto Denko represents a good risk/reward tradeoff to us.

Full sells Following our full sell of Sanki Engineering last quarter, we exited our position in Hibiya Engineering, another HVAC (heating, ventilation and air conditioning) engineering company that we had held for over a decade. Our initial investment thesis was that the company was undervalued as it traded below book value and had significant cash and investments that were not properly reflected in the market valuation. We also believed Hibiya’s operating margins should improve with enhanced operational efficiency and increased activity for infrastructure upgrades following years of restrained capital expenditure.

Throughout the holding period, we proactively engaged with Hibiya to tackle the issue of its excess capital, meeting with management and sending various letters urging improvement in corporate governance and capital efficiency. Hibiya was extremely receptive to our feedback and was one of the most active companies in the portfolio in terms of returning capital to shareholders through dividends and share buybacks. Over the past five years, the company’s outstanding shares have declined by 20%.

Recently, the company’s strong efforts to reduce excess capital and increase shareholders returns, as well as its improved operations, seemed to start gaining market appreciation, driving its share price to a point where we believed the upside optionality was fairly limited. While we are somewhat saddened to exit the position after our long ownership and fruitful relationship, we are happy to see the company succeeding in enhancing shareholders’ returns. We often refer to Hibiya Engineering’s long-term capital improvement efforts as a positive example in our dialogue with other companies, and we intend to continue to do so.

Current Thoughts and Conclusion While we are sincerely disappointed with the portfolio’s underperformance over the past two years, we remain optimistic about its long-term return potential. We are particularly encouraged by the portfolio’s average margin of safety, which has increased to levels that we have not seen in quite a while. Moreover, as part of our commitment to keep learning from our investment successes and mistakes, we have been diligent in reviewing holdings that have contributed to the underperformance, including our positions in banks, autos and auto components, and the portfolio’s large positions in Takeda Pharmaceuticals and Mitsubishi Tanabe Pharma.

Although we cannot predict the portfolio’s future performance, we believe its current positioning bodes well for the long term. We understand that it has been challenging to stay the course amid this difficult relative performance and we thank you for allowing us to manage your assets with flexibility and a long-term focus, which enable us to maintain a true value portfolio.

Book Value: Assets minus liabilities. Also known as shareholders’ equity.

Margin of Safety: The discount of a security’s market price to what the firm believes is the intrinsic value of that security.

Operating Margin: Operating income divided by net sales; used to measure a company’s operating efficiency.

Price/Book: Price per share divided by book value per share.

Return on Capital: Net income minus dividends divided by total capital; used to assess a company's efficiency at allocating the capital under its control to profitable investments.

The MSCI Japan Index with net dividends is designed to measure the performance of large and mid cap segments of the Japan market.

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

The foregoing Quarterly Commentary reflects the thoughts and opinions of Brandes Investment Partners® exclusively and is subject to change without notice. The information provided in the commentary should not be considered a recommendation to purchase or sell any particular security. It should not be

assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that the securities sold have not been repurchased. The actual characteristics with respect to any particular account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. 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