Japan Hedge Fund Manager Thrives In Crisis

Hedge fund manager Toru Hashizume has succeeded by adapting to Japan’s changing role. Why he steers clear of big names like Sharp and prefers game makers like Gree.

Toru Hashizume is one of those lucky guys whose skills perfectly suit their environment. The 43-year-old hedge fund manager thrives in a crisis, and his native Japan has provided ample opportunity for him to shine in the past 20 years.

Fresh out of college in 1991 Toru Hashizume got a job as an equity analyst at a big brokerage firm just as the country fell into its two lost decades of deflation and financial turmoil. His employer, Yamaichi Securities, went bankrupt seven years later, but  Toru Hashizume landed on his feet as a portfolio manager of the Mitsubishi UFJ Active Open mutual fund (ticker: 03311025.Japan). He developed a value-based strategy that mostly focused on cheap stocks, many of them in low-cost technology services that could grow regardless of Japan’s travails. The fund gained 6.69% a year on average from June 1998 to May 2006 while the Tokyo Stock Price Index (TOPIX), the broadest measure of Japan’s equity market, was losing 4.17% annually.
Impressed, Stats Investment Management, a hedge fund boutique that runs $265 million from a cramped Tokyo office, came calling in 2006, asking him to oversee its largest offering, the Ginga Services Sector Fund. Hashizume imported his “growth-at-a-reasonable-price” strategy from the mutual fund–and fortified it with a hedge fund’s ability to short stocks, an invaluable weapon in Japan’s weak markets. When the global markets crashed in 2008, his $161 million fund delivered a remarkable 13.20% net return that is, after deducting 1.5% in management and 20% in performance fees. His short positions drove returns. Hashizume was promoted to chief investment officer of the firm.
Mark Hibbs, a portfolio manager at Gen2Partners –  hedge fund, fund of funds manager in Hong Kong, says Hashizume’s performance is “unique” because his focus is almost entirely on domestic companies, yet he still has “demonstrated superior returns over many years, through some incredibly tough conditions.”
Japan’s recent woes have offered more chances to profit for the soft-spoken, taciturn Hashizume. His bottom-up approach doesn’t require him to spend much time analyzing Japan’s economy or its stock-market outlook–allowing him to avoid getting overwhelmed by the economic effects of the earthquake, tsunami, and nuclear-reactor meltdown that killed 20,000 people last March. He also doesn’t need to worry too much about the island nation’s latest recession.
“We don’t think there are residual returns to be made simply from top-down investments as there is generally a downturn in Japan’s overall situation,” he says.
Hashizume focuses instead on the revenues, earnings, and book values of Japanese companies, always searching for ones that look cheap. He has stopped looking at huge multinational manufacturers that are losing out to low-cost rivals from South Korea, where Hyundai Motor’s (005380.Korea) technology is on a par with that of Honda Motor (7267.Japan), and from Taiwan, where Foxxcon Technology Group (2354.Taiwan) now has more-advanced flat-screen technology than local champion Sharp (6753.Japan).
At present he’s attracted to information technology in Japan’s service sector, finding “hidden gems” in small companies that write software for cellphones and smartphones, as well as online gaming and electronic-commerce outfits. “We are interested in industries that make money off ideas, not from things,” says Hashizume. “We believe we are not restricted by any hardware capacity–just human development.”

Hashizume’s goal is to generate a net return of 15% over any rolling 12-month period from a diversified portfolio with long positions in about 80 stocks and short positions in another 60. (Most long positions are matched with a short position in the same industry). His Cayman-registered fund hasn’t quite met its goals, but it’s still beating the local stock market by a sizable margin. Since inception in June 2006, Ginga has delivered a net return of 10.35% annualized while the TOPIX has chalked up an annualized loss of 10.73%.
Although May was a rough month in Japan, Ginga, which means galaxy, is still reaping the benefits of Hashizume’s bargain-hunting after the earthquake. From March 14 last year to May 31 this year, Ginga delivered a 2.24% net return while the TOPIX fell 10.05%. The fund lifted its stakes in several firms that sell Internet-based social-media networking games inspired by Facebook (FB) offerings like Playfish but are now played by Japanese consumers on their phones.
Two of Toru Hazhizume’s biggest bets were on DeNa (2432.Japan) and GREE (3632.Japan), which together account for about half of the $4 billion global market for these digital games. DeNa is best known for its 2010 hit Kaito Royale, or Royal Thief, while GREE has pioneered social-network gaming with offerings such as fly-fishing competitions. He expects them to grow faster than hardware-based computer-game makers like Nintendo (7974.Japan) did back in their 1980s heyday because the new companies don’t rely on sales of consoles that Japan can no longer produce cheaply. The games are free at first, enticing customers but later begin to require payments. The fund sold some of its GREE stock last September, reaping a 37.1% return and again in February for an 8.7% gain. It unloaded most of its DeNa for a 42.9% profit in August and September last year,
Hashizume also is investing heavily in e-commerce companies. Right after the earthquake, store shelves emptied out quickly. Beleaguered Japanese consumers were forced to buy everything from food to clothes to medicines online and the habit has stuck. Ginga has snapped up Rakuten (4755.Japan), an online shopping mall offering fresh beef, sake, staplers, and many other items, in June last year, building up one of the fund’s biggest positions until he sold it in April this year for an 11.3% gain.
Leisure is another service industry where Hashizume has been busy. At the end of May, 5% of the fund–its largest position–was invested in Fuji Media Holdings (4676.Japan), one of a handful of terrestrial TV broadcasters. TV stations lost substantial ad revenue in the wake of the earthquake as Japanese advertisers considered it tasteless to sell products in the midst of such a catastrophe. But Ginga bought Fuji because it owns property on the scenic Tokyo waterfront, where Hashizume expects the government to buy land to develop leisure-oriented real estate, such as casinos. The stock was up 20.9% for the 12 months through June 18.
Ginga is currently about 65% short, mainly in construction companies like Daiwa House (1925.Japan). Those stocks soared to multiples of 60-70 times earnings after the earthquake on expectations that they would strike gold with major government contracts to rebuild highways, train stations and towns. But the government, now under its second prime minister since the quake, has yet to formulate a master plan for reconstruction. “We think they have a lot of downside,” says Hashizume.
By the end of this year, Hashizume expects the Nikkei 225 stock index to climb back up to the 10,000 level that it reached before the earthquake, from 8,500 currently. “Most companies are trading below their book value and, relative to their balance sheets, there should at least be some upside,” he says. He expects the yen to weaken, possibly to 90 yen to the dollar from 80 if interest rates rise in Europe. But Hashizume won’t spend a whole lot of his time worrying about the macroeconomic picture; he’ll be looking for individual stocks to buy or sell short.

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