The problem with all-you-can-eat ETFs in Japan
​ETFs are hitting the market faster than the dim-sum trolley can circle the banquet hall. Charles Schwab, in the 12 months to July 2015, saw a 130-fold preference of ETF over mutual funds given their relative simplicity, cost and transparency. It sure sounds good but for all the exotic flavours of ETFs one can feast on, one needs to be wary of indigestion when stomaching bear claws.
To show what an upset bear is capable of - the most recent stock market rout from Aug 17th, 2015 - stocks which had a higher percentage of ETF ownership suffered greater underperformance than those with less. The correlation is high with an R-squared of 84%. The study is best demonstrated below (Decile 1 = lowest ETF ownership, Decile 10 = highest ETF ownership). This is consistent with our report of Sept 4, 2015 which highlighted the higher excess volatility created by ETFs when confronted with bear market activity. With ETFs in Japan becoming a much larger part of traded value than several years ago, such excess volatility is likely to be exacerbated.
Many sell-side broking firms continue to intensify their focus on large cap stocks because they are stuck in the mindset that higher liquidity drives their turnover (exacerbated by commission compression), despite ignoring buy-side client requests that being the 20th analyst on a stock adds no value to their investment process. At Analogica KK we understand there is an ever widening gap between the buy and sell-side and we are filling the void.
Analogica KK's sole independent stock research focus is to look to the thousands of uncovered and undiscovered small-mid cap companies in Japan which are taking advantage of decades of staid business practice conducted by long time revered large cap companies. While small-mid cap coverage is very limited in the Japanese market we believe that experience is also a must to find emerging leaders. Analogica KK also researches thematics, politics, geopolitics and structural change and the impacts to industry.
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