(Corrects dateline to Sept. 25)
* Exporters have become expensive - portfolio manager
* Key is to find opportunity in untapped small caps - local
By Ayai Tomisawa
TOKYO, Sept 25 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
"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 capitalization of less than 200 billion
yen, instead picks up Daiseki Co, a Nagoya-based
company specialized in industrial waste disposal, as one
The sales of the company, which recycles disposal oil from
manufacturers' factories, are 100 percent generated in Japan.
"It's selling into Toyota and other manufacturers, so the
weakening of the yen absolutely impacts its customers which in
turn impacts them, and you've been seeing that flow through in
its earnings and revenue," Edwards said. "Daiseki is a very good
indicator in what's going on in the market."
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
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,
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.
"I am looking for stocks where something is changing and the
market is failing to fully appreciate the value of future cash
flows, and where capital is allocated in an efficient manner,"
said Nick Anderson, head of equity research at Henderson Global
Investors Limited based in London.
Local fund managers say that the key to investing in small
caps is whether portfolio managers can take advantage of their
"If you look at the Japanese market overall, half of the
companies have zero or one analyst covering, so we think that
there is big opportunity in them," said Nicholas Weindling,
portfolio manager at JPMorgan Asset Management based in Tokyo.
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.
(Editing by Simon Cameron-Moore)