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Ex-Goldman Manager, Ranked Japan’s Best, Avoids Nikkei

Hideto Fujino, a former Goldman Sachs Group Inc. (GS) manager whose independent fund is ranked one of Japan’s best, is beating peers by buying carparks and women’s gyms and shunning companies in the Nikkei 225 Stock Average (NKY), which has lost 80 percent since 1989.

Stocks such as Park24 Co. (4666) and women’s fitness-club operator Koshidaka Holdings Co. have helped Fujino’s 2.3 billion yen ($29.3 million) Hifumi Fund return 31 percent since October 2008, compared with a 23 percent drop on the Nikkei 225 and a 9 percent loss for the Tokyo Stock Exchange’s small shares index. The mutual fund, which includes eight companies from the Nikkei 225 in its 58-stock portfolio, was named Japan’s best this year by Rating & Investment Information Inc., the country’s top rating company.

“Investing in the big Japanese companies is a real gamble because they are so exposed to the volatile global economy, especially recently,” said Fujino, 45, chief investment officer at Rheos Capital Works Inc. in Tokyo. “If you look at small stocks, you can find a lot of companies where decision-making is fast and the focus is on long-term growth.”

Smaller companies have been insulated from slumping global demand and the yen’s two-year, 10 percent climb against the dollar that has hurt large Japanese manufacturers such as Sony Corp., he said. While companies on the Nikkei 225 get 27 percent of their revenue abroad on average, those on the Topix’s small shares index look overseas for only 10 percent of their sales, according to Bloomberg data.

TSE2 Index

Members of the Tokyo Stock Exchange’s Second Section Index, where the average market value of firms is $95.2 million and shares have returned an average of 9.4 percent this year, report a mean of 7.4 percent of sales from abroad, the data show. Shares of Nikkei 225 companies have lost 3.3 percent this year on average, the data show. The Nikkei 225 dropped 0.2 percent today, while the smaller-share measure fell 0.3 percent.

Park24, an operator of automated parking lots catering to as few as one vehicle, is the most heavily weighted stock in Fujino’s fund. By leasing unused land, including tight spaces between buildings, the company has amassed almost a half million parking spaces, taking advantage of property prices that have fallen 57 percent since 1991. Earnings per share more than tripled since 2000, according to data compiled by Bloomberg.

There were 1.7 million parking places in facilities of 500 square meters (5,380 square feet) or more in Japan as of March 2011, according to government data. Park24, whose sites have an average capacity of 14 cars, said it had 487,000 parking spots at the end of April.

Not Europe

“The high market share and stable earnings growth attracted me,” he said. “Besides, the company’s business has nothing to do with what’s going on in Europe.”

Fujino said he bought shares of Koshidaka, a founder-run company valued at 23 billion yen, because membership at its chain of women’s fitness clubs has doubled in three years to 453,000 in May. The stock has added 21 percent this year, compared with a 0.6 percent advance on the Nikkei 225.

“If you invest in companies that have decisive leadership, like ones that are run by founding families, you can beat the benchmark index,” he said.

Companies led by their founders account for half the top 10 performers on the Topix, the country’s broadest stock measure, in the past five years. These include food-court restaurateur Toridoll Corp., which more than tripled in value, and online medical information provider M3 Inc., which is up 134 percent.

Fujino left Goldman Sachs in 2003 to start an advisory company and five years later opened the Hifumi Fund (9C31108A), which he markets directly to individual investors at seminars and on his website. He said he was inspired to go out on his own after meeting more than 5,000 Japanese executives during his 20 years managing funds.

Hifumi Fund

Hifumi is ranked the second-best performing global value fund in Japan this year, according to data compiled by Bloomberg, and has outperformed its peers by 56 percent since it began in October 2008, according to data compiled by Bloomberg.

Fujino isn’t the only one profiting by steering clear of Japan’s biggest companies. Seven of the nation’s top 10 performing domestic long-only equity funds are small- and medium-cap funds, according to rankings compiled by Bloomberg.

“Big Japanese companies have a hard time adapting to change,” said Sato Yamato, professor of management at Keio University, the nation’s top-ranked private college. “There aren’t a lot of the strong leaders we need because this is a culture where the nail that sticks out gets hammered down.”

Olympus Scandal

Former Olympus Corp. (7733) President Michael Woodford was fired by the company’s board when he questioned outsized payments to advisers. The fees were later revealed to be part of a conspiracy to hide investment losses. The $1.7 billion cover-up cost the company about half its market value and added to concern about corporate governance at the country’s biggest companies.

A scarcity of independent board members and cross shareholdings among companies placed Japan 35th out of 38 countries, behind Greece and Indonesia, in a 2009 ranking of corporate governance by Governance Metrics International.

The biggest corporations are often more interested in showcasing new technology rather than giving consumers what they want, Fujino said, offering Sharp Corp.’s (6753) tablet computer as an example. The fact that the device, called the Galapagos, also serves as a television remote control and a wireless router hasn’t kept it from ranking 28th in sales behind Apple Inc.’s (AAPL) iPad, according to price comparison site Kakaku.com Inc.

Growth Focus

“These products are full of unnecessary functions,” Fujino said. “Consumers don’t get excited about them.”

Still, he said investing in Japan’s biggest stocks can work when money floods into the market, driving rallies. The Nikkei rose as much as 19 percent at the height of a four-month rally after the U.S. Federal Reserve introduced its second round of quantitative easing in November 2010.

Fujino favors companies such as Toyota where founders or their families still wield enough influence to keep management focused on long-term growth. Akio Toyoda serves as president of the automaker his grandfather started in 1937. Toyota (7203), which Toyoda took the reins of in 2009 after it reported a record loss, has risen 14 percent this year after dropping 20 percent in 2011.

“I make profits investing in Japanese companies because I select stocks based on a simple principle,” Fujino said. “A company’s share price goes hand in hand with its earnings growth, not its size or prestige.”

To contact the reporters on this story: Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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