CORRECTED-New GPIF investment manager drawn to cheap Japan mid-caps

Mon Sep 1, 2014 12:14am EDT

(Corrects size, headquarters location of Eastspring in paragraphs 4, 7 and 8)

* New GPIF manager Eastspring uses value-based investment models

* Eastspring tends toward mid-caps with long profit history

* Outside fund manager reckons Eastspring buys defensive stocks

By Ayai Tomisawa

TOKYO, Sept 1 (Reuters) - A new investment manager responsible for a small chunk of the $1.2 trillion portfolio held by Japan's giant public pension fund says it expects to buy stocks in midsize companies that appear cheap relative to the broader market and have decades of steady profits.

Appointed in April to manage 100.4 billion yen ($967 million) of the Government Pension Investment Fund's (GPIF) 20.8 trillion yen in Japanese equities, Eastspring Investments' approach offers an insight into how the world's biggest institutional investor's money will be used.

Eastspring, the Asia asset-management arm of UK-based Prudential plc, seeks to beat major market indices by finding "shares that are quite undervalued as a result of investors' bias toward fear or pessimism," Chief Operating Officer Shingo Sugiura told Reuters in an interview.

The Hong Kong firm's five Singapore-based Japanese equity portfolio managers do not so much target mid-caps as arrive at them through a value-based screening that narrows down the investments to a number manageable for its team, Sugiura said.

The portfolio managers look for stocks that are cheap against the benchmarks in terms of price-to-book ratios, price-to-earnings ratios and dividend yields.

"As a result, we ended up with midsize companies," Sugiura said. "We pick up seemingly very, very cheap stocks and thoroughly research their businesses."

It is the same method that Eastspring, with operations in 14 markets and $115 billion under management, uses for the rest of the 502.5 billion yen of Japanese equities it manages, Sugiura said.

Given its size, Eastspring's Japanese-equities team narrows down the companies it buys. The managers don't travel often to Japan, where Sugiura is based, but executives of target companies often visit them in Singapore, he said.

GPIF had surprised the asset-management industry this year by dropping many Japanese managers while hiring more foreign firms. It now has nine foreign and five Japanese active equity managers.

Foreign managers oversaw 1.48 trillion yen, or 58 percent, of GPIF's 2.56 trillion yen allocation to actively managed domestic equities at the end of March, up from 1.40 trillion yen, or 37 percent of a 3.73 trillion yen allocation a year earlier.

SHIFT TO EQUITIES

Under pressure from the government of Prime Minister Shinzo Abe to shift money into higher-risk assets and out of low-yielding Japanese government bonds, GPIF plans to boost the weighting of domestic stocks to more than 20 percent from a current 12 percent target, people with knowledge of the allocation review told Reuters last month.

That indicates nearly $100 billion of new money into the Tokyo stock market. Investors worldwide are closely watching what happens to GPIF's portfolio because of its size and its leading role among other big Japanese institutions.

Few GPIF managers will talk publicly about how they invest the fund's money for fear of angering the giant, whose assets are bigger than the Mexican economy.

Sugiura declined to name any of the roughly 40 Japanese shares his firm owns or specify where it might put its slice of Japanese pension money.

But regulatory filings show Eastspring owns just over 5 percent of home-improvement store operator Komeri Co and apparel maker Onward Holdings Co.

BEHAVIOUR PATTERNS

A fund manager not associated with GPIF, who asked not to be named, listed examples of stocks that might fit the criteria of being undervalued mid-caps with a long, stable profit history.

They included disposable diaper maker Unicharm Corp , food and seasonings maker Ajinomoto Co, meat processor NH Foods Ltd, brewer Asahi Group Holdings , cosmetics firm Shiseido Co, car-parts makers Denso Corp and Aisin Seiki Co, home-products maker Kao Corp, pneumatic equipment maker SMC Corp , electric-tool maker Makita Corp and gas-appliance maker Rinnai Corp.

Eastspring probably excludes electronics companies "as they heavily depend on economic cycles and silicon-price cycles," said the value-style fund manager.

He reckoned the firm looks for defensive stocks or those with return on equity over 10 percent to weather out shocks like the global financial crisis.

Eastspring says its "conservative value strategy" outperformed the Topix 100 index by 9 percent over the past three years and 12.1 percent over five years. Its "value strategy" beat the FTSE Japan index by 14 percent over three years and by 33 percent over five years.

Eastspring screens some 1,500 Japanese stocks with relatively big market capitalization, looking to pick up those that look cheap over 20 years of historical data.

Sugiura said Eastspring holds its investments for three years on average, reshuffling 30-40 percent of the shares in its portfolio a year.

The firm looks for companies with "sustainable minimum profits," which can make money in bad times as well as good, he said. (1 US dollar = 104.1500 Japanese yen) (Additional reporting by Hideyuki Sano; Editing by William Mallard and Simon Cameron-Moore)