Tokyo Hedge Fund Takes Investing Lesson From Tsukiji Market

JAPAN-LIFESTYLE-FISHING-AUCTION-NEW YEAR-FOOD

A fishmonger wheels away bluefin tuna to his shop after the morning auction at Tokyo's Tsukiji fish market.

Photographer: Yoshikazu Tsuno/AFP via Getty Images
  • New Simplex fund to invest in firms looking to move to Topix
  • The fund targets a return of 10 percent to 15 percent

Simplex Asset Management Co. is taking some lessons from Tokyo’s iconic wholesale fish market as it starts a fund to invest in companies looking to move their listings to the Topix index.

The new fund is betting that companies switching to the Topix will benefit from a broader base of investors and higher valuations, just like fishermen who bring their catch to the Tsukiji market can expect to command higher prices, Hiromasa Mizushima, chief executive and founding partner of Simplex said in an interview. Simplex oversees 549.1 billion yen ($4.9 billion) after more than doubling assets in the past three years.

Simplex’s new fund, starting this month, is part of a corporate governance strategy with a total of 136.4 billion yen under management. The fund will start with 3 billion yen and has set a limit of 30 billion yen, Mizushima said.

“The valuation will be adjusted” for stocks that move to the Topix, Mizushima, 62, said. “Everyone brings their catch to Tsukiji because that is a market where the sushi restaurants from Tokyo to Hong Kong come to buy their fish.”

Valuation Gap

Japanese companies listed outside of the benchmark Topix, or on so-called lower markets, tend to have a lower market capitalization and the potential to grow at a faster pace. Their market value is only about 3 percent of the total, even though they make up about half of companies traded in Japan, according to data from Simplex. That gap presents a universe of opportunities that Mizushima wants to exploit as he expects more companies will look to switch their listings to the main market.

Simplex has already had some success with its lower-market strategy. The firm gradually built a 14 percent stake in Nissin Sugar Co. in another one of its funds over two years prior to the sugar producer’s move to the Tokyo Stock Exchange in November. Its shares more than doubled to as high as 1,760 yen after the move that enabled the company to access a wider base of investors.

Simplex expects the new fund to generate a 10 percent to 15 percent annual return, and aims to raise money from domestic pension funds and overseas endowments. Simplex’s lower-market strategy covers stocks that are under the radar, said Mizushima, a former SMBC Nikko Securities banker who used to cover public offerings.

These companies are usually not covered by analysts and are most likely to be ignored by securities firms after initial public offerings, he said. Prior to an IPO, a company can get advice on business expansion or capital markets from both venture capital firms, as well as securities firms. After the IPO, they tend to be left on their own, even when they want to grow further. Simplex plans to guide and mentor the companies to succeed by offering suggestions on how to improve shareholder value and profits, Mizushima said.

“These companies all of sudden lost their mentors,” said Mizushima, who left SMBC in 2005 after more than two decades and launched a management buyout to take over Simplex, which he helped found in 1998. “Simplex will become their mentors.”

He has a track record of spotting new trends ahead of time. In 2005, a decade before the introduction of corporate governance in Japan and the recent increase in Japan-focused activist funds, Simplex had attracted investors to its Value Up fund that persuades management to increase shareholder value. That fund has grown to 88.3 billion yen in assets and has delivered a return of 81 percent since 2008.

As an extension of its corporate governance strategy, Mizushima set up a sub-strategy that bought undervalued companies with ample cash after their shares dropped during the global financial crisis in 2008. That fund, with 19.4 billion yen under management, has had a return of 122 percent since 2008, compared with a 59 percent gain in the Topix.

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