Hedge Fund Manager Mukai Picks Analysts, Not Stocks for Japan

Date: Friday, March 28, 2008
Author: Tomoko Yamazaki and Patrick Rial, Bloomberg

Tadashi Mukai outperformed all his hedge fund rivals in Japan last year by researching analysts, rather than companies.

Mukai's $21 million UMJ Neutro Fund climbed 11 percent, the biggest return among 13 market-neutral funds, those that don't take directional bets on stock benchmarks, according to data provider AsiaHedge. It gained 2.3 percent in the first two months of this year as the Topix index slumped 10 percent.

Fund adviser United Managers Japan Inc. plans to showcase that success to help boost assets to $500 million within a year even as global shares head for their largest first-quarter decline since 2001. Investors withdrew more than $7.7 billion from Japan-focused hedge funds last year as U.S. subprime mortgage defaults sapped appetite for risk.

``It has become abundantly clear to investors that they need a diversified portfolio of hedge funds that includes managers who perform in adverse market conditions,'' said Kirby Daley, head of sales and capital introduction for Asia at brokerage Newedge Group in Hong Kong. ``As money returns to Japan and Asia, the search is on for managers like this with a proven track record of strong and stable performance.''

Japanese pension funds and banks have shown interest in investing in Mukai's fund, said Rory Kennedy, chief operating officer at United Managers. He declined to provide specific names, adding that current clients include pension funds and institutional investors.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their investments.

Screening Process

Mukai, 43, uses his own analyst database, tracking stock recommendations against three years of share performances, a departure from standard ratings that rely on fund-manager voting. He only follows the advice of analysts who rank first or second in his tables.

``Instead of visiting companies, I periodically screen analysts,'' Mukai said in an interview in Tokyo on March 21. ``The key is to combine quantitative and fundamental analysis.''

The process began by whittling down Japan's 4,000 publicly traded companies to the 1,500 stocks that trade the most. Mukai then discarded those on the list not covered by analysts, focusing on research-driven ideas because market volatility had wreaked havoc with computer models that use quantitative analysis to select stocks.

The MSCI World Index, a benchmark for global shares in developed markets, dropped 9.2 percent this year, on course for its worst first quarter since a 13 percent slump in 2001.

Toyota Recommendation

When markets are less volatile, Mukai reverts to his computer models to seek out companies trading at less than fair value, using measures including return on equity, the volume of margin trades and earnings, he said.

Mizuho Securities Co.'s Eisaku Ohmori, who ranked ninth among semiconductor and electronics parts analysts in the Nikkei Veritas annual popularity survey published this week, held the top spot in Mukai's accuracy ranking. Hosiden Corp., one of Ohmori's ``strong buy'' recommendations, was the top performer in the UMJ fund last month with a 12 percent advance.

Mukai also took the advice of Yoshio Watanabe, another Mizuho analyst, and bought shares of Toyota Motor Corp. in August 2006 after Watanabe raised his rating on the stock. He held the shares in Japan's largest automaker until the middle of 2007, earning a return of more than 25 percent.

Mukai, who received a Master of Business Administration in finance at Tokyo's Hitotsubashi University, is confident that combining his two strategies will keep him atop the rankings and attract new investors.

``There aren't any funds that have my hybrid combination of fundamental and quant analysis in Japan,'' he said. ``So that's an edge I've got.''

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.