`Craftsman' Stock Picker Beats 98% of Peers by Mixing Two Styles

  • Parvest Equity Japan Small Cap Fund sees inflows during rout
  • Uses `value-to-growth' approach to small-cap investing

As foreigners flee much of the rest of the Japanese stock market, they’ve been flocking to one fund.

Shunsuke Matsushima’s Parvest Equity Japan Small Cap Fund took in $118 million from Asia, Latin America and Europe in the three months ended March 31, as its holdings served as a haven from a selloff in bigger companies. Matsushima travels the country talking to executives, assessing each firm and choosing cheap stocks he hopes will become the next hot thing -- a hybrid style he calls “value-to-growth” investing. Small shares, he says, are one area where old-school stock pickers like himself can still beat the market.

“In value to growth, we pick companies that trade at lower than their industry average and have future growth prospects or drivers that are not factored into their share prices,” Matsushima, who outperformed 98 percent of peers over the past five years, said in an interview in Tokyo. “Whereas value investing seeks a reversion to the mean, in value to growth price-to-earnings ratios can expand significantly.”

Japanese stocks are the second-worst performers this year among 24 developed equity markets tracked by Bloomberg, as the yen gained against the dollar and foreign investors posted their longest stretch of selling since 1988. Smaller firms have fared better as they tend to get less earnings from abroad and be ignored by overseas money managers.

Matsushima visits about 300 companies a year, usually those not covered by analysts, seeking to unearth the next Fast Retailing Co. or Rakuten Inc. before people outside Japan have even heard of it. His fund has 130 stocks, none of which can be more than 500 billion yen ($4.6 billion) in market value, and counted Japan Material Co., TPR Co. and Nissei Build Kogyo Co. as its largest holdings at the end of March.

Japan Material, which provides gas-management services for semiconductor plants, has already started this shift, according to Matsushima. The company’s PE ratio, which he says was 10 when he bought the shares, is about twice that level today. TPR, which makes piston rings and other car parts, is still in the value phase, he says, as is Nissei Build, a maker of prefabricated houses. Japan Material shares surged 72 percent in the past year through Tuesday. They rose 1.3 percent on Wednesday. TPR gained 0.1 percent, while Nissei Build fell 0.5 percent.

Venture Capital

“The philosophy is a bit like venture capital,” Matsushima said. “But in venture-capital investing there’s a chance your investment will go to zero, whereas these are listed companies, so while that does occasionally happen, the probability is low.”

Matsushima says his fund would have never selected a stock such as Yahoo Japan Corp. because it was too expensive even when it listed, even though it had strong growth prospects. He gives the example of retailer Yamada Denki Co. as a company he bought before it shifted from a narrow regional focus to become a household name within Japan in electronics retailing. The shares rose more than six-fold between 2003 and 2006.

“Shares that truly transform from value to growth can provide strong returns,” he said.

The Parvest Equity Japan Small Cap Fund, which oversees $694 million, has returned an average of 21 percent annually over the past five years, according to data compiled by Bloomberg. It’s down 4.5 percent this year, against a 12 percent drop for the Topix. Fears the nation will fall back into deflation, and concerns the yen will curtail exporters’ earnings growth are eroding investors’ confidence that Prime Minister Shinzo Abe’s growth strategy can end the country’s three-decade economic malaise.

Matsushima, 51, heads the equity investing group at Sumitomo Mitsui Asset Management Co., which runs the fund for BNP Paribas Investment Partners Japan Ltd. Japan has about 3,000 small-cap stocks and investors are gradually recognizing their growth potential, he said. The Topix Small Index, consisting of 1,432 companies that get most of their sales within Japan, is near the highest level versus the measure of the country’s biggest 30 stocks in data going back to 1989.

Exploiting Inefficiencies

“There’s very little coverage of small caps from the sell-side,” said Tony Glover, Tokyo-based head of the investment management department at BNP Paribas Investment Partners Japan. “A very good stock picker can exploit the inefficiencies in the market. That leads to outperformance and that certainly helps to attract new money,” he said. “Clients are adding small-caps to their portfolio for a little bit of diversification within Japanese equities.”

Matsushima, who’s been investing in smaller shares for about 20 years, says that while other money managers also look to pick growth stocks before they explode, he doesn’t know of any that codified the approach into an investment style.

“I may be a fund manager, but I’m a kind of tradesman at heart,” the unassuming Matsushima said when pushed on why his fund has done so well. “I see myself as like a craftsman making custom-made shoes, one after another, to fit each particular foot.”

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