A top-performing Japanese small-cap fund is betting that pressure on companies to provide financial information in English will help spur demand for shares that foreign investors tend to avoid.
Gesiuris Asset Management’s Marc Garrigasait, who manages the Japan Deep Value Fund FI from Barcelona, got a head start by side stepping domestic brokers for information and spending months studying translated material to help find undervalued firms with liquid assets. This year it’s enabled his fund to beat 97% of its peers, according to Bloomberg data.
“When we analyzed all these annual reports translated to English, that’s the moment that we said, ‘wow, this is incredible, we will launch a fund,’” said Garrigasait, who started Japan Deep Value in 2016.
An improvement in transparency may help revive foreign demand that drove Japan’s stock market to multi-decade highs earlier this year, partly thanks to improvements in governance. While many foreign funds remain bullish over the long run, they have taken profit in recent weeks as the blue-chip Nikkei 225 Stock Average slid on concerns over the risk of higher US interest rates and an economic slowdown in China.
Garrigasait’s currency-hedged fund has climbed 22% this year, more than double the Topix’s return in euro terms. He focuses on firms with ample free cash flow, little debt and a traditional business model that is easy for investors outside of Japan to follow.
His $37 million fund has its biggest stake in Shinnihon Corp., a construction company that’s up almost 60% this year and has foreign ownership of less than 20%, according to data compiled by Bloomberg.
The strategy has allowed the fund to shine despite the underperformance of small-cap shares in general. The Topix Small Index has climbed only 15% so far this year in local currency terms, while the benchmark gauge has surged more than 20%. Small-cap shares are undervalued because many don’t have enough information in English, according to Garrigasait.
Tokyo’s bourse operator said last week that it discussed mandating firms that are popular with overseas investors to provide English-language material. Less than half of the firms with a market cap lower than ¥25 billion ($167 million) offer investor relations presentations in English, compared with more than 80% for firms with a size of at least ¥100 billion, according to TSE figures. An exchange survey showed that about 80% of overseas firms without staff that can read Japanese are dissatisfied with the situation.
“Pushing to report in English is very, very important,” Garrigasait said. “Language is one of the key points of undervaluation in the small, and especially, the micro caps.”