Foreigners hunt small Japanese shares as big caps no longer cheap – Business Recorder

RECORDER REPORT

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–> Long-term foreign investors are looking into small cap Japanese shares as the Tokyo market’s bellwethers such as Toyota Motor Corp and Sony Corp no longer look cheap even after considering the effect of the weak yen. Some fund managers have been dabbling in subcontractors of big Japanese exporters while others look at companies whose coverage by analysts is low and have been neglected by international investors.

“Many export-oriented companies have become a little expensive to us,” said Drew Edwards, portfolio manager at Advisory Research Investment Management based in Chicago, who has $800 million under management.

Edwards, who has more than 40 Japanese stocks in his fund, mainly ones with market capitalisation of less than 200 billion yen, instead picks up Daiseki Co, a Nagoya-based company specialised in industrial waste disposal, as one example.

The sales of the company, which recycles disposal oil from manufacturers’ factories, are 100 percent generated in Japan.

Driven by Prime Minister Shinzo Abe’s aggressive reflationary policies, the benchmark Nikkei has risen 41 percent so far this year, the best performer among developed countries.

The gains were mostly led by exporters on the back of the weakening yen, which lifts their competitiveness abroad as well as their profits overseas when repatriated. Toyota has risen 61 percent while and Sony has gained 118 percent so far this year, respectively.

After a big rally, foreign investors’ interest in Japanese shares remained high.

The number of overseas money managers at recent conferences in Tokyo organised by Mizuho Securities doubled to 320 from its previous conference in February. Some 500 attended a Bank Of America Merrill Lynch event this month, about twice the number at its previous event a year ago.

Local fund managers say that the key to investing in small caps is whether portfolio managers can take advantage of their untapped potential. He owns internet-related stocks such as MonotaRO Co , M3 Inc and Kakaku.com Inc, whose stocks prices soared 94-216 percent this year.

Even after these surges, Weindling intends to hold the shares for now.

“We think that these companies have multi-year growth ahead of them. It’s not a one- or two-quarter story, it’s not a two- to three-year story. It’s a ten-year-plus story,” he said.

Copyright Reuters, 2013