Sensato Doubts Japan Stock Valuation After Hedge Fund’s 15% Gain

Sensato Capital Management LLC, the Man Group Plc-backed manager of $1.3 billion assets, said Japanese stock valuations are no longer attractive after its Asia hedge fund returned 15 percent this year through April.

The Sensato Asia-Pacific Master Fund returned almost 7 percent in April, the second-strongest monthly performance since it opened to investors in June 2010, according to a newsletter to investors. Bets on rising Japanese stocks were a big contributor, the San Francisco-based manager added.

The Nikkei 225 Stock Average surged almost 12 percent last month to the highest level since 2008 after the Bank of Japan said it will double the monetary base in its biggest round of quantitative easing. The gauge has jumped more than 70 percent since the end of September on expectations that unprecedented stimulus by Prime Minister Shinzo Abe and the central bank will end 15 years of deflation.

“Investors have aggressively sought to gain exposure to reflationary themes, paying scant attention to company fundamentals,” according to Sensato’s newsletter. “While the Japanese market is no longer attractively valued, earnings and sentiment trends suggest potential for further nominal appreciation.”

Sensato’s co-founders Ernest Chow and Jonathan Howe as well as Chief Operating Officer Meme Scherr didn’t reply to e-mail messages seeking comment on the newsletter.

‘Very Stretched’

New capital flooding into the market has driven up prices of already expensive stocks, especially those with high borrowings and long-duration cash flows, Sensato said. Japanese real estate, financial and utility stocks are among those with “very stretched” valuations, it added.

Investor sentiment has posed challenges for fundamental stock selection in the near term, it said. The fund lost money on some of its stock picks based on company fundamentals, according to the newsletter.

An example is Hulic Co., a Japanese property developer whose stock price jumped 40 percent last month to trade at 4 times book value and more than 30 times expected earnings, the newsletter said. Hulic’s share price has fallen 4 percent this month.

Sensato said it will probably keep bets on overvalued Japanese stocks, such as Hulic, to fall. The fund has tightened controls to curb potential losses from single stocks and industries most affected by the changing investment and economic environment in the country.

Computer Model

The Sensato fund has returned a cumulative 70 percent since inception, more than triple the 21 percent gain in the Eurekahedge Asian Hedge Fund Index. It has made profits in each of the years, according to the newsletter. The Eurekahedge index rose 9 percent in the first four months of 2013.

Sensato was set up in May 2009 by Chow and Howe, former co-heads of active-equity strategies at Barclays Global Investors. It uses computer models to screen stocks by generating forecasts of returns and allows human judgment to override systematic signals in situations such as the earthquake and tsunami in Japan in 2011, a person familiar with the fund told Bloomberg News last year.

Sensato opened the fund to investors in June 2010 after starting initially with money from friends and family, according to a statement in October 2010. It stopped accepting new money into the fund in September.

FRM Capital Advisors, a division of Financial Risk Management Ltd., the London-based fund-of-funds manager that was acquired by Man Group Plc last year, became its first institutional investor in September 2010, according to the statement. The U.K. manager invested $50 million with Sensato, Sensato said in the statement.

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