* Favours laggard telecoms and railway companies
* Cautious on outlook for Japanese consumers
* Sees new DPJ government acting within expectations
By Harpreet Bhal
LONDON, Sept 16 (Reuters) - UK-based financial services group GLG is bullish on the long-term outlook for Japanese equities due to their attractive valuations, and is buying telecoms and transport stocks which have been shunned by other investors.
Neil Edwards, co-manager of the GLG Japan Core Alpha Fund said Japan has an attractive price-to-book (PBR) ratio of 1.2 times, making stocks in the country attractive on valuations, while dividend yields are at levels last seen in the 1970s.
The long-only fund aims to pick up bargain stocks which have been lagging the market rally such as telecommunications and railway firms, while selling positions in outperforming sectors like technology, Edwards told Reuters in an interview.
The fund added defensive mobile phone firm KDDI Corp to its mix, and increased holdings in peer NTT DoCoMo, while it bought underperforming railway firms East Japan Railways, Central Japan Railways and West Japan Railways.
"What we're trying to do constantly is exploit the propensity for mean reversion," Edwards said, referring to the theory that prices eventually move towards historical averages.
"The more a stock has underperformed and the cheaper its relative price-to-book ratio is, the more we'll have in it ... because they're laggards and there is value in them."
The 585 million pound fund has returned 19.7 percent in the year-to-date against a 2 percent fall in the benchmark Topix index in the same period, while it returned 16.8 percent in the second quarter against a 7 percent rise in the benchmark.
The fund also invests in retailers Seven & I Holdings, which it sees as cheap, and AEON, but Edwards remains cautious on the outlook for consumer spending in Japan.
The incoming Democratic Party of Japan has pledged to stimulate consumption by putting money in the hands of households but private consumption is likely to remain weak.
"The Japanese consumer is according to the surveys, in a somewhat fragile state. I think Japanese corporations are also going to be very cautious before they start reinvesting," he said.
STRAITJACKET
Edwards said he was cautious about the implications of the new government's assent to power in Japan but was not unduly worried as he said the government would be limited in the extent to which it could advocate drastic changes.
The Democratic Party faces a raft of challenges including growing social welfare costs in a rapidly ageing society and tattered public finances since coming to power in late August.
"I think they're so constrained by the straitjacket that any government in Japan wears," he said.
"They have got a borrowing situation which is worse than any other developed country and I don't think markets would let them behave irresponsibly," he said.
On the outlook for the economy, Edwards said he sees strong demand for Japanese exports, especially from neighbouring China, which he said would help support the yen.
"China desperately wants to get its hands on as much high technology as it can and buying Japanese products is one way in which it can look to gain access to technology," he said. (Editing by Jon Loades-Carter)