Hedge Fund Bets on Japanese Stocks That Shouldn’t Be Listed

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An Oslo-based hedge fund’s love for unloved Japanese stocks has proved a winning passion for more than a decade.

“Our model is good at identifying companies that shouldn’t be listed,” Trond Hermansen, who manages Sector Zen with analyst Lars Solberg, said in an interview. “We’d like to invest in companies that don’t have high returns today but have a lot of cash and easily could have high returns going forward.”

The Japanese stock market had a rough decade with the global financial crisis and the Fukushima nuclear disaster in 2011. The Topix Total Return Index was up just 29 percent from April 2006 through May this year, compared with a 167 percent return for the S&P 500 and a 101 percent gain in the FTSE 100. Sector Zen, which makes both long and short bets on stocks, has delivered a return of 188 percent.

Some of that performance is a result of the takeovers of Panahome and Hitachi Koki, which were bought out by Panasonic Corporation Co. Ltd. and KKR & Co., respectively. The $140 million fund currently holds Nissan Shatai Co. Ltd., which manufactures vehicles for its parent Nissan Motor Co. Ltd. and is down 13 percent so far this year.

More Pressure

“We think Nissan may buy 100 percent or sell it,” said Hermansen, who has invested in Japanese stocks since 1995. The company has a lot of cash on its balance sheet, while Nissan already owns 43 percent.

Hermansen sees more active investors, especially from abroad, pushing Japanese companies to become more shareholder friendly. Asset Value Investors Ltd. bought a stake in Tokyo Broadcasting System Holdings Inc. before proposing it pay out 40 percent of its stake in Tokyo Electron to shareholders. Sector Zen also holds TBS.

“These companies have a tradition of being very conservative,” he said. “But there’s more pressure now. More active shareholders are entering. This is a typical case.”

The fund had 41 long and 13 short positions at the end of May. It’s shorting Aeon Co. Ltd., Toto Ltd. and Panasonic, which as a conglomerate suffers from “relatively low” operating margins, he said.

“The company has benefited from a strong global macro environment recently, but that makes it vulnerable in a slowdown,” he said. “Another risk factor is exposure to Tesla within its battery business.”

Hermansen, who manages the fund from his office on the Oslo fjord, said “it’s a strength to sit in Norway.”

“There’s so much noise in the live market,” he said. “If you have a more long-term fund, there’s nothing to win by sitting in the local market.”

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