Japan to Launch ETFs Focused on Undervalued Stocks

Simplex Asset Management of Japan announced the launch of exchange-traded funds focused on undervalued stocks, including the first aimed at shares trading at less than book value, reflecting demand for exposure to the wave of corporate reform that is rallying Japanese markets.

The Nikkei has gained 24% this year, compared to a 13% gain for global stocks, and foreigners have poured 7.7 trillion yen ($53 billion) into the market as a push to tighten up flabby balance sheets drives buybacks and price gains.

Years of conservative management and the accumulation of cross-shareholdings have resulted in many companies trading below the value of their assets less liabilities. The Topix 500 has 189 companies that trade below book value, compared to 17 in the S&P 500, according to simplex.

A rare call from the Tokyo bourse to improve capital efficiency at such firms is partly behind the recent rally as investors have taken it a signal authorities are serious about unlocking value after decades of underperformance.

The funds will be launched next week and will focus on market segments where many investors see the most potential. One of the funds, Simplex PBR Improvement over 1x ETF, will hold 500 stocks that are worth 0.7 times their book value on average.

Another fund, Simplex Strg Shareholding Disposal Promotion ETF, invests in approximately 200 companies with a web of cross-shareholdings, a common practise in Japan that has come under scrutiny as part of the push for capital management reform.

"The time has come to launch these funds," Hiromasa Mizushima, CEO of Simplex Asset Management, said.