Michael Shimoko Michael Shimoko Director, SPARX Asset Management Co., Ltd. Director, SPARX Asset Management Co., Ltd. ([email protected]) ([email protected]) January 29, 2002 January 29, 2002 Excellence in Asset Management Excellence in Asset Management - SPARX Japan Long Short Fund - - SPARX Japan Long Short Fund -
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Michael Shimoko Director, SPARX Asset Management Co., Ltd.
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The SPARX Long Short Fund’s objective is to generate absolute The SPARX Long Short Fund’s objective is to generate absolute returns based on “locally-based” fundamental researchreturns based on “locally-based” fundamental research
Investment Objective:To preserve capital and to provide absolute returns for investors
Investment Approach:– Capitalize on intensive “in-house” research expertise and extensive
information network for stock selection– Long portfolio includes all publicly-traded equity securities– May opportunistically use convertible bonds and warrants on the long-side– Takes independent long- vs. short-approach, but may occasionally use pair-
trading approach– Short portfolio generally consists of large-cap names– Normal portfolio carries a net long bias, but may shift according to market
conditions– Total gross exposure (long + short portfolio) is usually 100% or less of NAV to
Since inception, the Long Short Fund has yielded an average annual Since inception, the Long Short Fund has yielded an average annual return of 19.84% with less than one-half of the volatility of the marketreturn of 19.84% with less than one-half of the volatility of the market
Cyclical positives – business cycle, sentiment, equity prices, liquidity Cyclical positives – business cycle, sentiment, equity prices, liquidity -- are making Japanese stocks look very attractive-- are making Japanese stocks look very attractive
Source: Bank of Japan1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
The market’s expectation of future prescriptive action rather than The market’s expectation of future prescriptive action rather than solvency risk accounts for the fall of the Japanese bank stockssolvency risk accounts for the fall of the Japanese bank stocks
0
20
40
60
80
100
120
9/11/01 10/11/01 11/11/01 12/11/01 1/11/02
MizuhoMTFGUFJMitsui-Sumitomo
(Price as of September 11, 2001 = 100)
Source : Bloomberg
Such action will dilute existing shareholders Such action will dilute existing shareholders and lower book values of affected and lower book values of affected
institutions, thus at-risk banks have seen a institutions, thus at-risk banks have seen a significant decline in their stock pricessignificant decline in their stock prices
A low risk premium reveals that the market is not concerned about A low risk premium reveals that the market is not concerned about systematic risk (solvency risk)systematic risk (solvency risk)
Source : BBA
-10
0
10
20
30
40
50
60
70
80
90
100
95/1/
495
/7/4
96/1/
496
/7/4
97/1/
497
/7/4
98/1/
498
/7/4
99/1/
499
/7/4
00/1/
400
/7/4
01/1/
401
/7/4
02/1/
4
(basis points)
3-Month
6-Month
(Yen LIBOR Base)
The structural negatives have obscured the largely cyclical, positives…The structural negatives have obscured the largely cyclical, positives…
Unlike the 1998 crisis, a safety Unlike the 1998 crisis, a safety net has been built into the net has been built into the Japanese financial systemJapanese financial system
The weakening yen will contribute to higher profit margins for The weakening yen will contribute to higher profit margins for manufacturing companiesmanufacturing companies
Meanwhile the unwinding of cross-share holdings is creating an Meanwhile the unwinding of cross-share holdings is creating an overhang in the equity marketsoverhang in the equity markets
Source: GS Equity Derivatives Research, DatastreamNote: Crossholding ratio = 1 - (GSCA Japan market cap/FT/S&P Japan market cap); annual (Jan.) measurements.
35%
40%
45%
50%
55%
1992 1993 1994 1995 1996 1997 1998 1999 20008,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
2001
Crossholding Ratio (%)
Nikkei 225
37.5%37.5%
51.3%
Going forward, anticipate Going forward, anticipate 4 trillion yen worth of 4 trillion yen worth of stock sold every yearstock sold every year
This selling pressure is offset by growing demand from Japanese This selling pressure is offset by growing demand from Japanese public institutions who must re-balance their investment portfoliospublic institutions who must re-balance their investment portfolios
Japanese EquityWeight :
1.3 5.0% 5.7 6.0% 4.4 12.0%
Amount (JPY trillion): 3.2 12.5 7.0 7.4 6.5 17.6
Source : Goldman Sachs
Trust Fund Bureau Account Domestic Bonds Domestic Stocks Foreign BondsForeign Stocks Others
Postal Savings Public PensionKampo
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Ass
et A
lloca
tion
Actual Model Portfolio
Actual Model Portfolio
Actual Model Portfolio
Nearly 20 trillion yen must be Nearly 20 trillion yen must be invested in Japanese equitiesinvested in Japanese equities
Today’s Price / Book valuations show that a number of companies Today’s Price / Book valuations show that a number of companies are trading under book valueare trading under book value
Though at a ten-year low, the Japanese stock market is looking very Though at a ten-year low, the Japanese stock market is looking very attractive from a cyclical point of viewattractive from a cyclical point of view
Source: Bank of Japan1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
SPARX Asset Management Co., Ltd.SPARX Asset Management Co., Ltd.Gate City Ohsaki East Tower 16FGate City Ohsaki East Tower 16F1-11-2 Ohsaki, Shinagawa-ku, Tokyo 141-0032, Japan1-11-2 Ohsaki, Shinagawa-ku, Tokyo 141-0032, Japan(Tel) 81-3-5435-8200 (Tel) 81-3-5435-8200 (Fax) 81-3-5435-8201(Fax) 81-3-5435-8201
U.S. OfficeU.S. OfficeSPARX Investment and ResearchSPARX Investment and ResearchWaikiki Trade CenterWaikiki Trade Center2255 Kuhio Avenue, Suite 16202255 Kuhio Avenue, Suite 1620Honolulu, Hawaii 96815-2626Honolulu, Hawaii 96815-2626(Tel) 1-808-931-2000 (Tel) 1-808-931-2000 (U.S. Toll Free) 1-800-334-1906 (U.S. Toll Free) 1-800-334-1906 (Fax) 1-808-931-2099(Fax) 1-808-931-2099Contact: Michael ShimokoContact: Michael Shimokoemail: [email protected] email: [email protected]
This report has been prepared by SPARX Asset Management Company, Limited for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of
any offer to buy. While all reasonable care has been taken care to ensure that the information contained herein is not untrue or misleading at the time of the publication, we make no representation as to its
accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions
without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report may not be
reproduced, distributed or published by any recipient for any purpose.