TOKYO -- While most Tokyo Stock Exchange investors seem unwilling to take a chance on underpriced shares amid economic uncertainties over Brexit, one contrarian hedge fund is breaking ranks with an eye on long-term profits.
The Nikkei Stock Average closed up 0.09% at 15,323.14 on Tuesday. But the quiet session simply proved that many investors are still taking a wait-and-see stance three trading days after the British voted to exit the European Union. Very few are snapping up shares that plunged after the referendum.
"There are issues everywhere that are clearly mispriced to anybody's eyes," a stockbroker at a U.S. hedge fund said that afternoon. Dai-ichi Life Insurance, for example, "faces headwinds from negative interest rates, but its stock price is half what it was at the beginning of the year," the broker said, calling it "a prime example of wrong pricing in Japan's current stock market."
But the fund surprisingly had not invested in Dai-ichi Life. "If we think in terms of the next year or two, this is the perfect opportunity, but hedge funds are being forced to manage our assets on a month-to-month basis in order to keep our clients," the broker said.
Most hedge funds focused on Japanese stocks have taken losses since the start of the year. This specific fund lets investors withdraw on the first day of January, April, July and October with one month's notice.
"The next notification date is Sept. 1," the broker said. "We need to quickly lock in any unrealized profit and boost our liquidity ratio. We can't take risks even if we wanted to." Pension funds and mutual funds face a similar conundrum.
Yet Singapore-based Effissimo Capital Management is thriving even under these conditions. The fund has stakes of at least 5% in 14 companies, including Dai-ichi Life, Yamada Denki, Kawasaki Kisen and Ricoh. These stakes alone are worth more than 400 billion yen ($3.89 billion).
Effissimo was founded by Takashi Kousaka and former colleagues at a now-defunct fund run by activist investor Yoshiaki Murakami. "At Effissimo's core is a team Mr. Murakami sent to Singapore when he was considering relocating his base there," a source familiar with the matter said. "It also inherited some of its clients from Mr. Murakami's old fund."
Effissimo, once known for aggressive tactics that often put it at odds with companies, has toned down its approach. It apparently voted against reappointing Kawasaki Kisen President Eizo Murakami at a recent shareholders meeting but has not made any other noteworthy moves.
For the time being, the fund's portfolio is showing mixed results. It is expanding its position on a number of stocks with falling prices, such as Dai-ichi Life. The fund apparently has lockup agreements with investors, allowing it to purchase underpriced shares without fear of losing clients.
Effissimo clearly stands out in the current market. But if contrarian investors were more ubiquitous, perhaps prices would be less volatile than they are now.