Small-caps in new Tokyo stock index jump on investment benchmark hopes

Dominic Lau
Wednesday, 6 Nov 2013 | 10:59 PM ET

TOKYO, Nov 7 (Reuters) - Fast-growing and small-cap stocks included in a new Japanese market index jumped on Thursday on hopes the gauge will be used as a benchmark for investment by asset-rich public funds.

Shares of cable broadcaster Usen Corp and car dealer VT Holdings surged 13 percent and 7.1 percent respectively after they were included in the new index, the JPX-Nikkei Index 400.

Part of the excitement in the stocks was that a panel tasked to review the investment strategy of public funds with more than $2 trillion in assets said in an interim report that it was considering using the gauge as its equity investment benchmark.

Designed to showcase companies with high return on equity and robust corporate governance, the index will include 12 other small-cap firms and fast-growing e-commerce company Rakuten Inc alongside Usen and VT, which are listed on the Tokyo Stock Exchange second section, the Mothers board or the Jasdaq index.

The JPX-Nikkei Index 400 was unveiled on Wednesday by the Tokyo Stock Exchange and Nikkei Inc, publisher and index compiler for the benchmark Nikkei share average. It will begin operations from the start of next year.

Of the 400 constituent stocks, 386 feature in the main board Topix index.

Traders said further details on whether the Government Pension Investment Fund (GPIF) or other asset managers would use the new index as their benchmark would be key to attract more interest in the product in the long-run.

"As it stands right now, there is no money tracking this new index, so there is no real need for anybody to step in to do anything right now," said a senior trader at a foreign bank in Tokyo.

"The real story is whether they can get any domestic asset managers tracking this. I guess most importantly the GPIF ... people are thinking whether this guys will track or not."

Another trader said he would look to short some of those 14 stocks, all of which rose Thursday. Among them are companies like automobile frame parts maker G-Tekt Corp and online game developer Gungho Online Entertainment Inc.

Despite the gains, another trader said it was too early to get too excited.

Last month, a Citigroup report said high ROE stocks in Japan had not necessarily delivered higher investment returns.

"When we separated the Topix 500 into actual ROE quintiles, rebalance every year, and checked the performance, we found that the highest ROE quintile turned in the worst performance," it said.

"We think the reason is that many high ROE companies have already attracted high valuations and there is not much upside potential left."

(Reporting by Dominic Lau; Editing by Kenneth Maxwell)