June 6 (Bloomberg) -- Gottex Fund Management Holdings, which allocates $6.4 billion to hedge funds, has cut its largest Asia fund’s bets on small Japanese companies whose share prices may fall more sharply in the market correction.
The $250 million Penjing Asia Fund now allocates two-thirds of its Japan investments with managers that focus on large companies, which have appreciated less in the recent rally and are likely to benefit from rising corporate activities, Max Gottschalk, Gottex’s Asia chief executive officer, said in an interview yesterday. That compared with an equal split at the end of December.
The benchmark Nikkei 225 Stock Average has tumbled 16 percent since May 22, the peak of a 76 percent rally from Sept. 28 in anticipation that the economic stimulus and monetary easing of Prime Minister Shinzo Abe and the Bank of Japan would end 15 years of deflation. Both the Nikkei and the Jasdaq Stock Index of smaller companies, which surged 88 percent in the eight months, have dropped as bond yields jumped.
“A big part of the rally in the equity market in Japan has been in small- to mid-caps,” Hong Kong-based Gottschalk said. “Some of them may have become too expensive. If there’s any market volatility, liquidity will dry up so the small-cap market will potentially have more risk on the downside.”
Penjing Asia Fund, which had investments in seven Japan managers by May, returned almost 10 percent in the first four months, according to Gottschalk. Japan-related managers contributed about three-fifths of the profits, he added.
The fund allocated about 28 percent of its investments in April to Japan-focused funds, including those betting on rising and falling stocks and corporate events. The figure also included funds that picked Japanese securities without taking market risks and Asia-wide funds with more than half of the money invested in Japan, he said.
The percentage doubled since December 2011 and averaged about 26 percent in the first four months, said Gottschalk.
Gottex doesn’t plan to reduce its Japan investments “significantly,” he said. Instead, the latest allocation change was part of Gottex’s efforts to rotate between currencies, bonds and stocks to take advantage of trading opportunities in Japan, he added.
“Now the economy is improving, there seem to be real changes taking place,” Gottschalk said. “Large corporates like Sony, for example, are considering making dramatic changes to their corporate structure, unleashing value. That was unheard of.”
Sony Corp. is working with Morgan Stanley and Citigroup Inc. as it considers billionaire investor Daniel Loeb’s proposal to sell as much as 20 percent of its entertainment assets in an initial public offering, people familiar with the matter said last week.
Earlier inflows into Japanese equity markets have been dominated by individuals and foreign investors, Gottschalk said. The next wave, likely to be driven by Japanese institutions shifting assets from bonds to more risky assets, will help support equity prices, he added.
Japan’s Government Pension Investment Fund, which manages more than $1 trillion, is considering higher investments in stocks in the most significant revision in strategy since 2006, Reuters reported on May 30, citing unidentified people. It is trying to move away from the weakening and volatile bond market to take advantage of a stock rally, according to the report.
The BOJ’s unprecedented quantitative easing will provide a floor for the prices of government bonds, enabling Japanese institutions to make the switch, Gottschalk said.
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