Index Rebal/Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal/Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Quantitative Analysis

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<p>When Japanese small-cap stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange and are accepted, it causes significant events to occur. This triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event. This opens up several interesting trading opportunities for investors. </p>
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<p>In this insight, I have provided performance updates for 7 "Live" event stocks which are expected to have Inclusion Events at the end of December 2020 or January 2021 and 8 "Post" event stocks that completed their Inclusion Events at the end of October 2020 and November 2020. Furthermore, I have also highlighted some interesting Pre-event situations involving stocks that are likely to become TSE1-promotion candidates in the near future. </p>
</div>


When Japanese small-cap stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange and are accepted, it causes significant events to occur. This triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event. This opens up several interesting trading opportunities for investors. 


In this insight, I have provided performance updates for 7 "Live" event stocks which are expected to have Inclusion Events at the end of December 2020 or January 2021 and 8 "Post" event stocks that completed their Inclusion Events at the end of October 2020 and November 2020. Furthermore, I have also highlighted some interesting Pre-event situations involving stocks that are likely to become TSE1-promotion candidates in the near future. 


<p>There are currently ~1,500 stocks listed in the Mothers, JASDAQ, and Second Sections of the Tokyo Stock Exchange. As time passes, some of these stocks will "graduate" to the First Section of the Tokyo Stock Exchange (TSE1), triggering inclusion into the TOPIX Index causing passive funds tracking TOPIX to buy them on an inclusion event. This presents various trading opportunities in several phases of this event timeline.  </p><p>Being able to identify such candidates at a "Pre-event" phase (before the TSE reassignment is confirmed) can unlock great value for speculative bets as we recently witnessed in the case of <a href="https://www.smartkarma.com/insights/topix-inclusion-4931-jp-shinnihonseiyaku" target="_blank" data-smartkarma-citation="insights:45660" rel="noopener">TOPIX Inclusion (4931 JP): Shinnihonseiyaku</a> where the stock gained 90%+ in the ~5 months leading to the TSE1-reassignment announcement. </p><p>However, in July 2020, TSE introduced more stringent new Section Transfer Requirements and TSE1 Listing Criteria adding a new layer of complexity to this prediction process, especially during the period of transition from the old rules to the new rules. </p><p>In this insight, we take a look at how some of the potential TSE1 candidates will fare against these New Section Transfer Requirements and evaluate their attractiveness at the Pre-event phase. </p><hr><div class="content-remarks"><p>This insight is an update to <a href="https://www.smartkarma.com/insights/topix-inclusion-pre-events-who-is-ready" target="_blank" data-smartkarma-citation="insights:41091" rel="noopener">TOPIX Inclusion Pre-Events: Who Is Ready?</a>. Please refer to that insight for more information on the approach used in the below analysis. Note that some assumptions used in the analysis have changed since then. </p></div>

There are currently ~1,500 stocks listed in the Mothers, JASDAQ, and Second Sections of the Tokyo Stock Exchange. As time passes, some of these stocks will "graduate" to the First Section of the Tokyo Stock Exchange (TSE1), triggering inclusion into the TOPIX Index causing passive funds tracking TOPIX to buy them on an inclusion event. This presents various trading opportunities in several phases of this event timeline.  Being able to identify such candidates at a "Pre-event" phase (before the TSE reassignment is confirmed) can unlock great value for speculative bets as we recently witnessed in the case of TOPIX Inclusion (4931 JP): Shinnihonseiyaku where the stock gained 90%+ in the ~5 months leading to the TSE1-reassignment announcement. However, in July 2020, TSE introduced more stringent new Section Transfer Requirements and TSE1 Listing Criteria adding a new layer of complexity to this prediction process, especially during the period of transition from the old rules to the new rules. In this insight, we take a look at how some of the potential TSE1 candidates will fare against these New Section Transfer Requirements and evaluate their attractiveness at the Pre-event phase. This insight is an update to TOPIX Inclusion Pre-Events: Who Is Ready?. Please refer to that insight for more information on the approach used in the below analysis. Note that some assumptions used in the analysis have changed since then. 

TOPIX Inclusions:  New Regulations! Who Is READY? 2.0

<div>
<p>When Japanese small-cap stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange and are accepted, it causes significant events to occur.</p>
<p>This triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event. This opens up several interesting trading opportunities for investors. </p>
<p>In this insight, I have provided performance updates for 3 "Live" event stocks which have announced their TSE1 move in  October 2020 and 5 "Post" event stocks that completed their Inclusion Events today and some Pre-event trades involving stocks that are likely to become TSE1-promotion candidates in the near future. </p>
</div>


When Japanese small-cap stocks listed on JASDAQ, MOTHERS, and the Second Section of the Tokyo Stock Exchange aim at the big leagues and apply for reassignment to the First Section of the Tokyo Stock Exchange and are accepted, it causes significant events to occur.
This triggers inclusion into the TOPIX Index which means passive funds tracking TOPIX need to buy on an inclusion event. This opens up several interesting trading opportunities for investors. 
In this insight, I have provided performance updates for 3 "Live" event stocks which have announced their TSE1 move in  October 2020 and 5 "Post" event stocks that completed their Inclusion Events today and some Pre-event trades involving stocks that are likely to become TSE1-promotion candidates in the near future. 


<div><p>In July 2020, I discussed potential screening methods for Japanese small cap stocks to help investors take advantage of the TSE1-promotion related speculative demand they enjoy between 6 and 12 months from their IPO. These discussions can be found in the following insights. </p></div><div>
<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/topix-inclusion-pre-events-post-ipo-strategies-for-japanese-small-caps-1cb373f5-ef5b-4447-8e93-6209ced24be8" target="_blank" data-smartkarma-citation="insights:41358" rel="noopener">TOPIX Inclusion Pre-Events: Post-IPO Strategies for Japanese Small-Caps</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/topix-inclusion-pre-events-post-ipo-basket-trade-in-detail" target="_blank" data-smartkarma-citation="insights:41411" rel="noopener">TOPIX Inclusion Pre-Events: Post-IPO Basket Trade in Detail</a> </li>
</ul>
<div class="content-highlight">
<p>In the period this strategy was recommended, a theoretical equally-weighted portfolio following this strategy would have had an absolute return of +21.3% and a TOPIX-relative return of +14.9%.</p>
<p>On an annualized basis, these returns would have been +111.1% and +77.7% respectively.</p>
<p>It has done OK.</p>
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<p>However, as I discussed in my last insight <a href="https://www.smartkarma.com/insights/topix-inclusion-trade-summary-sep-2020" target="_blank" data-smartkarma-citation="insights:43700" rel="noopener">TOPIX Inclusion Trade Summary: Sep 2020</a>, the Tokyo Stock Exchange is about to introduce more stringent requirements for future Section Transfers which means the thresholds suggested for these strategies (available in the insights above) might no longer be applicable for future TSE1 candidates. </p>
<p>Therefore, I believe it might be time to unwind this strategy. </p>
<p>Below is a short summary of this strategy, a discussion of the performance of this strategy since its introduction, the list of trades (stocks and dates of entry and exit), and some future implications to this concept. </p>
</div>

In July 2020, I discussed potential screening methods for Japanese small cap stocks to help investors take advantage of the TSE1-promotion related speculative demand they enjoy between 6 and 12 months from their IPO. These discussions can be found in the following insights. 


TOPIX Inclusion Pre-Events: Post-IPO Strategies for Japanese Small-Caps 

TOPIX Inclusion Pre-Events: Post-IPO Basket Trade in Detail 


In the period this strategy was recommended, a theoretical equally-weighted portfolio following this strategy would have had an absolute return of +21.3% and a TOPIX-relative return of +14.9%.
On an annualized basis, these returns would have been +111.1% and +77.7% respectively.
It has done OK.

However, as I discussed in my last insight TOPIX Inclusion Trade Summary: Sep 2020, the Tokyo Stock Exchange is about to introduce more stringent requirements for future Section Transfers which means the thresholds suggested for these strategies (available in the insights above) might no longer be applicable for future TSE1 candidates. 
Therefore, I believe it might be time to unwind this strategy. 
Below is a short summary of this strategy, a discussion of the performance of this strategy since its introduction, the list of trades (stocks and dates of entry and exit), and some future implications to this concept. 


TOPIX Inclusions - Post-IPO Strategies for Japanese Small Caps: Time to Unwind and Rethink

<p>In late July 2020, the Tokyo Stock Exchange issued Revisions to <em>Listing Rules to Enhance Functions for Raising Funds through the Capital Market</em>. These were discussed by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a> in <a href="https://www.smartkarma.com/insights/the-tse-s-listing-criteria-revisions-part-i" target="_blank" data-smartkarma-citation="insights:43150" rel="noopener">The TSE's Listing Criteria Revisions - Part I</a>.</p><p>These revisions have very important implications to Pre-event trades in the TOPIX Inclusions Universe as fewer candidates will be able to meet these more-stringent new requirements. In this insight, we take a look at how these new requirements will influence our Pre-event trades. </p><p>In addition, I have also provided performance updates for 5 "Live" events which have announced their TSE1 move in September 2020 and 6 "Post" events that involves stocks which have already had their Inclusion events in August 2020. As noted last month, unusually there were no inclusions for September due to section/segment reassignment.</p><p><em>As always, there is more below the fold. </em></p>

In late July 2020, the Tokyo Stock Exchange issued Revisions to Listing Rules to Enhance Functions for Raising Funds through the Capital Market. These were discussed by Travis Lundy in The TSE's Listing Criteria Revisions - Part I.These revisions have very important implications to Pre-event trades in the TOPIX Inclusions Universe as fewer candidates will be able to meet these more-stringent new requirements. In this insight, we take a look at how these new requirements will influence our Pre-event trades. In addition, I have also provided performance updates for 5 "Live" events which have announced their TSE1 move in September 2020 and 6 "Post" events that involves stocks which have already had their Inclusion events in August 2020. As noted last month, unusually there were no inclusions for September due to section/segment reassignment.As always, there is more below the fold. 

Japan

SRE Holdings Corporation operates real estate businesses. The Company provides real estate sales, housing renovation, housing loans, real estate brokerage, and other services. SRE Holdings also operates information technology platform development, artificial intelligence solution development, and other businesses.

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SRE Holdings Corp (2980 JP)

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As I discussed in my last insight TOPIX Inclusion Trade Summary: Sep 2020

Janaghan Jeyakumar, CFA

TOPIX Inclusion Trade Summary: Sep 2020

The Tokyo Stock Exchange will be introducing new requirement

Janaghan Jeyakumar, CFA

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