Interview with Hiroki Itoh, CEO of Alphex Investments Company Limited (Tokyo)
Alphex Investments Company Limited is the
advisor to the Arlington Alphex Japan Fund,
a non-benchmark, absolute return fund focused
on Japanese public equities across all market
Can you discuss the Arlington
Alphex Japan Fund and the background of
the research team at Alphex Investments?
The Arlington Alphex Japan Fund was
launched on 4 April this year with just
over US$7 million. The fund is advised
by Alphex Investments in Tokyo and managed
by Arlington Capital Management in Singapore.
Alphex Investments is a five-person
team headed by CIO Ichiro Takamatsu
and myself as CEO and risk manager.
We co-founded Alphex Investments in
2004, having previously worked together
for seven years at CIGNA International
Investment in Tokyo, where Takamatsu-san
was head of equity investments and I
was head of investments.
We currently advise on a total of US$45
million in both long/short and absolute
return Japanese equity funds.
Takamatsu-san is supported by two research
analysts, Sanae Saga and Koki Okahashi.
Okahashi-san covers the automobile and
raw material sectors. Saga-san looks
after retail, food and services. Takamatsu-san
covers electronics, financials and the
remaining other sectors.
Can you discuss your investment
process and how it gives you a competitive
advantage in Japan's current market
We take a bottom-up, fundamental approach
in a search for both value and growth
companies trading at compelling valuations.
We believe the investment story today
in Japan is one where there is sustainable
economic improvement led by the domestic
sector. But underneath this improvement,
there is a growing divergence between
successful and losing companies.
In order to have an investment edge
in this environment, one must have a
deep and experienced investment team
that spends its time meeting with companies,
trying to find those successful ones
that are trading at good valuations
and where we also have an informational
And these successful companies may
not be only the large caps that are
extensively covered by the brokerage
community. We believe that you have
to cover all market capitalisations;
and being Japanese nationals with local
expertise gives us a competitive advantage,
especially for the mid and small caps.
Finally, Japanese equities can be extremely
volatile at times; and one needs to
be active in trimming positions or placing
index hedges when portfolio holdings
run past their fair value. We will aggressively
move our net exposure depending on the
market conditions; and believe our edge
in this respect comes from Takamatsu-san's
trading experience shown from his track
record at CIGNA and Alphex Investments.
What is your firm's outlook on
the Japanese economy and markets for
the next 12 months?
Generally, we are positive on the Japanese
economy and markets. We are expecting
market returns over the 12 months to
be around 15%, consistent with the earnings
improvements we are going to see from
We think that the Japanese economy
has already entered into a self-sustainable
economic expansion, predominantly led
by the recovery in domestic sectors.
From market supply/demand factors, we
would like to see more domestic investors
shift their allocations to Japanese
equities. This potential shift also
supports our positive view on the markets.
However, we don't believe the rise will
be as sharp as what we saw last year.
Will that increase in allocations
be coming from Japanese institutions?
We believe in the coming months we're
going to see Japanese financial institutions
shifting from being net sellers to net
It appears that the re-flation
story in Japan is well known with year-on-year
CPI and real estate numbers both positive.
Is there more room for the financial
and real estate sectors to run?
I think going forward it is not going
to be a free play like it was, where
every name in the real estate and financial
sectors outperformed because they were
beneficiaries of the re-flation story.
We are going to see some mixed results
in both sectors going forward. We will
need to focus on individual companies'
quality of earnings and expected rate
Will this environment favour
the regional or city banks?
The city banks have gone through a
very difficult period of streamlining
their businesses with large mergers
and system integrations, as well as
writing down their non-performing loans.
Given this, we think the large city
banks are in a position to capture any
forward momentum we see in loan growth
and improvement in interest rate margins.
Do you feel real estate prices
this year will begin to rise outside
of the three largest cities - Tokyo,
Osaka and Nagoya?
Nagoya in particular has seen property
values in the commercial area rise,
having benefited from the Toyota group.
The areas outside these three cities
are still lagging. I think we will see
a gradual spillover improvement led
by the prime properties supported by
strong demand from both domestic and
foreign real estate funds.
How is the fund playing the real
We were early enough last year to participate
in the rise of the real estate and construction
stocks; we still like the sector in
general but are less excited than before
which calls for more selective individual
stock-picking going forward.
What effect will possible rate
rises from the Bank of Japan (BoJ) later
this year have on Japanese equities?
The BoJ's intention is to step up on
its first move towards normalisation
in monetary policy. I think the next
move will be to inch up short-term interest
rates. Our belief is that they will
do one rate hike around the third quarter
this year. The forward curve on the
money market futures is implying two
rate increases, which we believe is
We expect that the Japanese fundamentals
are in a sound position to absorb any
negative impact from rising interest
rates. In fact, expectations for rate
hikes may spark front loading of capital
and housing investments, contributing
to GDP growth.
What effect will the transition
to a new Prime Minister in September
have on reforms?
Our view is that we are not likely
to see any significant changes in the
speed of reforms whoever the successor
is. I think Prime Minister Koizumi has
pushed hard for structural, economic
reforms which are well appraised by
the markets but on the other hand have
resulted in unintended divergence between
winners and losers at the corporate
and household level.
However, if the successor does move
backwards on reforms, then markets would
take it as a sign of retreat and be