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Stocks

Market Scramble: Whale watchers on the hunt for smaller caps

TOKYO -- With the Nikkei Stock Average weighed down by concerns over the U.S. economy and waning oil prices, smaller companies have emerged as solid bets among investors shadowing massive public funds dubbed "whales."

However, those behemoths are as elusive as ever. "I haven't observed any aggressive [portfolio] rebalancing purchasing by public money," said Kenji Abe of Okasan Securities. The Government Pension Investment Fund and Japan's three big mutual aid pensions have the leeway to snap up an estimated 5.9 trillion yen ($58.2 billion) worth of Japanese equities. But Abe said those pension managers are not surfacing in the market like they used to, despite recent price corrections.

Amid the market's relatively tranquil waters, whale watchers are navigating among startups and stocks with capitalizations in the small to medium range. The GPIF had poured over 46 billion yen into issues traded on the Tokyo Stock Exchange's second section and markets for startups as of the end of March 2015, data released Friday shows.

Japanese public pension funds are not the only investors interested in smaller caps. French asset manager Amundi dedicates much of its stock allocation to small- and midcap issues, said Romain Boscher, the firm's global head of equities.

"We have begun to invest in companies that have market capitalizations at or below 100 billion yen," said a Japanese equity manager at a major asset management firm. It has become essential for institutional investors to find bargain stocks with high growth potential in order to beat the market average on a consistent basis.

At the end of this past March, 18.48% of the GPIF's assets were active investments, more than 5 points higher than a year earlier. That could be taken as a sign that the fund may allocate more of its assets to smaller-cap equities down the road.

Many of these smaller-cap stocks employ unique business models. The GPIF has invested in a wide range of internet advertising outfits, like Septeni Holdings for example, and human resources service providers such as en-Japan and Benefit One. Septeni's share price has more than tripled from the end of March 2015, and en-Japan has more than doubled in value. Benefit One shares have nearly doubled.

It is unknown whether the GPIF is still holding these firms. However, shares held in trust bank accounts do provide some clues. Septeni's aggregate stake held at Japan Trustee Services Bank rose more than 10 points to 21.8% in the year to March. Septeni reached its all-time high back in July.

This year, the TSE's second section and the bourse's Mothers market for startups have both outperformed the Nikkei average. On Tuesday, the Nikkei Jasdaq Stock Average and the Mothers index ended on a high note.

"If deregulations targeted toward agriculture, the environment, medicine and other sectors take shape, the growth narrative surrounding small to midsize stocks will take an even deeper hold," said Osamu Tokuno at Invesco Asset Management (Japan). These stocks may increasingly find themselves the subject of whale watching once earnings season draws to a close.

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