Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Advantest Placement - Selldown and Clean up by Fujitsu

Advantest (6857 JP): Memory Downturn Yet to Impact Advantest

Quiddity Advisors

Event-Driven

The JPX-Nikkei 400 Index was <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20130514E_1.pdf" target="_blank">announced</a> in mid 2013 as an effort between the JPX and Nikkei (with the Nikkei newspaper and others suggesting significant input from the GPIF) to create an index with the "goal of promoting Japanese companies with high investment appeal at home and abroad."<blockquote>Constituent selection and calculation rules will be developed using a holistic corporate analysis approach, including a focus on efficient capital usage and sustainable corporate value creation as well as qualitative elements that meet the standards of global investors.</blockquote>That was cute. When they announced the index at the end of July, they said...<blockquote>We have high hopes that the new index will contribute to improved capital efficiency and corporate value, and promote innovation of the listed companies. In addition, by serving as a new investment benchmark for domestic and overseas investors, we expect the new index to stimulate the qualitative improvement and revitalization of the Japanese stock market.</blockquote>In early November 2013, the JPX announced the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20131106E_4.pdf" target="_blank">guidelines</a> and methodology of the index.<h2>It's A Pretty Awful Index</h2><ul><li>My first thought back then, unchanged until now, is that this index was designed to fail. The construction methodology suggested a significant number of changes every year, and was designed to kick out companies after a bad year or two, when the stock price was low, then let them back in a couple of years later after results had rebounded.</li><li>The index had an inherent ability to sell low and buy high. Any appeal to the underlying selection criteria which included some governance measures (and the arithmetic average ROE is higher), and the benefit of capping index weights at a very low level (1.5%) allowing for a weighting methodology closer to arithmetic rather than pure market-cap weighted was offset by the ability of astute traders to estimate the likely inclusion basket long in advance.  <ul><li>Index construction starts with selecting a universe of the highest liquidity stocks among the top 1200 market caps. It selects 1000 stocks. Then it ranks those 1000 stocks by ROE, by Operating Profit, and by Market Cap. 40% of the score is 3yr average ROE rank. 40% is 3yr total OP rank. 20% is MarketCap rank.</li><li>There is an alternate set of criteria designed to promote "good features". A company gets a qualitative score added if it adopts IFRS, if it releases earnings information in English, and if one-third of directors are independent (with a minimum of 3 directors). But this set of criteria is designed to only change about 10 names in and out of the index (i.e. 2.5% of 400 members).</li><li>All of these "qualitative" measures are likely to be characteristics of larger companies, so it in effect rewards companies which are in the area of say a 301-600 rank according to market cap and a 401-800 rank in 3-year average ROE and 3-year total OP - companies on the bubble of not being selected. THOSE companies, if they really desire, can get themselves higher up the ranking by changing director policy, adopting IFRS, and/or releasing earnings in English. All of that costs, mentally if not much practically. Those who do not do it already who decide to do it to become an index constituent are perhaps should think twice. Investors to whom that extra effort for index constituency appeals would be advised to think twice too. They only get in because they don't meet the other measures.</li></ul></li></ul><h2>But It Is An Index, And It Rebalances, So We Look At It</h2>Today after the close, the JPX <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20170807E_1.pdf" target="_blank">announced</a> the annual rebalance results of the JPNK400 Index. 31 names will be added and 28 removed. Total one-way turnover to rebalance this year is 5.0% (last year 4.5%, 2015 was 5.9%, and 2014 was 6.2%) using price data at the end of July. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/031/184/original/20170807_JPNK400_Changes.png?1502120257" class="editor-image img-responsive" data-smartkarma-image-id="31184"></figure><hr>Below the fold, I dig into some of the interesting characteristics of the JPNK400 rebalance, how much tracks the index in terms of hard trackers, and we look at liquidity impact on the trade.

The JPX-Nikkei 400 Index was announced in mid 2013 as an effort between the JPX and Nikkei (with the Nikkei newspaper and others suggesting significant input from the GPIF) to create an index with the "goal of promoting Japanese companies with high investment appeal at home and abroad."Constituent selection and calculation rules will be developed using a holistic corporate analysis approach, including a focus on efficient capital usage and sustainable corporate value creation as well as qualitative elements that meet the standards of global investors.That was cute. When they announced the index at the end of July, they said...We have high hopes that the new index will contribute to improved capital efficiency and corporate value, and promote innovation of the listed companies. In addition, by serving as a new investment benchmark for domestic and overseas investors, we expect the new index to stimulate the qualitative improvement and revitalization of the Japanese stock market.In early November 2013, the JPX announced the guidelines and methodology of the index.It's A Pretty Awful IndexMy first thought back then, unchanged until now, is that this index was designed to fail. The construction methodology suggested a significant number of changes every year, and was designed to kick out companies after a bad year or two, when the stock price was low, then let them back in a couple of years later after results had rebounded.The index had an inherent ability to sell low and buy high. Any appeal to the underlying selection criteria which included some governance measures (and the arithmetic average ROE is higher), and the benefit of capping index weights at a very low level (1.5%) allowing for a weighting methodology closer to arithmetic rather than pure market-cap weighted was offset by the ability of astute traders to estimate the likely inclusion basket long in advance.  Index construction starts with selecting a universe of the highest liquidity stocks among the top 1200 market caps. It selects 1000 stocks. Then it ranks those 1000 stocks by ROE, by Operating Profit, and by Market Cap. 40% of the score is 3yr average ROE rank. 40% is 3yr total OP rank. 20% is MarketCap rank.There is an alternate set of criteria designed to promote "good features". A company gets a qualitative score added if it adopts IFRS, if it releases earnings information in English, and if one-third of directors are independent (with a minimum of 3 directors). But this set of criteria is designed to only change about 10 names in and out of the index (i.e. 2.5% of 400 members).All of these "qualitative" measures are likely to be characteristics of larger companies, so it in effect rewards companies which are in the area of say a 301-600 rank according to market cap and a 401-800 rank in 3-year average ROE and 3-year total OP - companies on the bubble of not being selected. THOSE companies, if they really desire, can get themselves higher up the ranking by changing director policy, adopting IFRS, and/or releasing earnings in English. All of that costs, mentally if not much practically. Those who do not do it already who decide to do it to become an index constituent are perhaps should think twice. Investors to whom that extra effort for index constituency appeals would be advised to think twice too. They only get in because they don't meet the other measures.But It Is An Index, And It Rebalances, So We Look At ItToday after the close, the JPX announced the annual rebalance results of the JPNK400 Index. 31 names will be added and 28 removed. Total one-way turnover to rebalance this year is 5.0% (last year 4.5%, 2015 was 5.9%, and 2014 was 6.2%) using price data at the end of July. Below the fold, I dig into some of the interesting characteristics of the JPNK400 rebalance, how much tracks the index in terms of hard trackers, and we look at liquidity impact on the trade.

Sumitomo Mitsui Financial Group (8316 JP)

Mitsubishi UFJ Financial (MUFG) (8306 JP)

Advantest Corp

JPX Nikkei 400 Rebalance Announced