Northwest Warrant Fund Returns 203% This Year on Japan Trades

Northwest Warrant Fund Ltd., the best-performing equity hedge fund tracked by Bloomberg in the past year, returned 203 percent in the first 10 months betting that Japan’s stimulus will bolster stock prices.

The $32 million fund has investments in almost $500 million worth of convertible bonds, said George Philips, chief executive officer of Northwest Investment Management (HK) Ltd., which runs it. More than 80 percent of its investments are tied to Japan and Northwest plans to keep it at that level, he said.

The Bank of Japan in April pledged to reach a 2 percent inflation target in two years by doubling its monthly bond buying, which is part of Prime Minister Shinzo Abe’s reflation strategy dubbed Abenomics. The effort has weakened the yen about 15 percent to about 102 per dollar this year and has sent the Nikkei 225 Stock Average to a 50 percent gain, heading for its best annual advance since 1972.

“It’s still early days,” Philips said. “If the 2 percent inflation target of the Bank of Japan is seen through, we would expect to see considerable corporate activities over time.”

The warrant fund buys convertible bonds, sells the fixed-income components of the securities through asset swaps and keeps the options to convert the securities into stocks.

Warrant Funds

Warrant funds like the one run by Northwest benefit from stock price gains and their performances may swing. The Northwest fund returned 224 percent in 2009 and lost 89 percent in 2008, according to the company’s newsletters. Investors like pensions sometimes use such funds to exploit from stock market gains with minimal capital tied up, Philips said.

The Northwest Warrant Fund made profits this year from bets on medical equipment maker Nipro Corp., Nidec Corp., one of the world’s largest makers of small precision motors mainly used in hard-disk drives and optical-disk drives, and department-store operator Takashimaya Co., Philips said.

Nipro’s share price jumped 32 percent in May on news that ReproCell Inc., a Yokohama-based stem-cell research company in which it owns a minority stake, planned to go public.

A further slide of the yen will make Japanese exports more competitive and trigger earnings surprises for Japanese companies like Nidec, Philips said.

Nidec, Takashimaya

Nidec, based in Kyoto prefecture, in October revised up its operating profit forecast by 7 percent for the year to March 2014, adding to a similar-sized revision in July, according to data compiled by Bloomberg. It assumed an exchange rate of 95 yen to the dollar in its interim results announcement, meaning more upgrades in forecast earnings may be on the cards should the Japanese currency continue its slide, according to Philips.

Japanese companies raised a combined 521 billion yen through convertible bond offerings this year, the highest since 2008, according to data compiled by Bloomberg. Takashimaya raised 65 billion yen in two sales last month, while Nagoya Railroad Co. sold 25 billion yen of such securities in September.

Northwest, which oversees about $650 million assets, predicted the Japanese currency would weaken to 100 yen to the dollar in January.

“We think 115, 120 is very realistic” by the end of next year, Philip said during the interview on Nov. 29, referring to the yen-dollar exchange rate. “This is not transitory.”

The BOJ has been buying more than 7 trillion yen ($68 billion) of bonds each month as part of its plan to double money supply by the end of 2014 to help pluck the country out of 15 years of deflation.

The intervention is bound to have a bigger impact on an economy less than two-fifths the size of that of the U.S., where the Federal Reserve has been spending $85 billion on monthly bond purchases, Philips said. Anticipated U.S. rate increases as policymakers in the world’s largest economy scale back monetary stimulus could further weaken demand for the Japanese currency as investors exploit the interest-rate differentials, he added.

“The impact is going to be very significant for corporate Japan,” said Philips.

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