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Michael ShimokoMichael ShimokoDirector, SPARX Asset Management Co., Ltd.Director, SPARX Asset Management Co., Ltd.
([email protected])([email protected])
January 29, 2002January 29, 2002
Excellence in Asset ManagementExcellence in Asset Management
- SPARX Japan Long Short Fund -- SPARX Japan Long Short Fund -
2© 2002 SPARX Asset Management Co., Ltd.
SPARX is a unique independent investment management company SPARX is a unique independent investment management company based in Japanbased in Japan
SPARX Asset Management
AUM (12/28/01) : Approximately $2.2 billion or 290 billion yen
Licenses: Discretionary investment managementSecurities investment trust management
Capitalization: Publicly-traded as of Dec. 4, 2001 (Jasdaq market)
Employees: 70 employees(majority of which have an equity interest in the firm)
Japanese Equity Specialist• Intensive bottom-up research since
1989• 2000+ company visits annually• Unique network amongst Japanese
companies’ top management• 14 research analysts (master degrees
at foreign universities as well as overseas investment experience)
Global Client Base• Europe, North America, Japan, and
Asia- Financial institutions- Pension funds- Corporations- Foundations- Family offices / high net worth clients
3© 2002 SPARX Asset Management Co., Ltd.
Overview of SPARX Long Short Fund
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
avoid excessive risk
4© 2002 SPARX Asset Management Co., Ltd.
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
(Inception=100)
40
60
80
100
120
140
160
180
200
220
240
6/22/97 10/31/97 3/31/98 8/31/98 1/29/99 6/30/99 11/30/99 4/28/00 9/29/00 2/28/01 7/31/01 12/28/01
SPARX Long Short Fund
NK 225 (USD)
7.76% -33.27%2001 Calendar Year Return
Key Statistics Long Short Fund NK 225 (USD)
19.84% -10.12%Average Annual Return115.62% -54.73%Inception to 12/28/01
1.39% -0.62%Sharpe Ratio (annualized)11.55% 25.24%Standard Deviation (annualized)
5© 2002 SPARX Asset Management Co., Ltd.
Gross – Net Exposure
The Fund is a long-biased product and typically does not employ The Fund is a long-biased product and typically does not employ leverageleverage
0%
20%
40%
60%
80%
100%
120%
140%
160%
97/6 97/9 97/12 98/3 98/6 98/9 98/12 99/3 99/6 99/9 99/12 00/3 00/6 00/9 00/12 01/3 01/6 01/9 01/12
GROSS NET
Long / Short Ratio
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
97/6 97/9 97/12 98/3 98/6 98/9 98/12 99/3 99/6 99/9 99/12 00/3 00/6 00/9 00/12 01/3 01/6 01/9 01/12
LONG SHORT
6© 2002 SPARX Asset Management Co., Ltd.
The 3-Year Cycle
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
*Average Outstanding
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Money Supply
(M2 + CD)*
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20028,00010,00012,00014,00016,00018,00020,00022,00024,000
+51%
-33%
+56% -
43%
+62%
-54%
NIKKEI 225 – Price Index
June 9421,552.81
July 9514,485.41
June 9622,666.8
Oct 9812,879.97
April 0020,833.21
Sept 019,504.41
Source: Datastream
Aug 9214,309.41
7© 2002 SPARX Asset Management Co., Ltd.
Appendix – SPARX 2002 Outlook for JapanAppendix – SPARX 2002 Outlook for Japan
8© 2002 SPARX Asset Management Co., Ltd.
“Mega-Bank” Stock Price Performance
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
9© 2002 SPARX Asset Management Co., Ltd.
Japanese Risk Premium
Concern overConcern overLTCB’s failureLTCB’s failure
YamaichiYamaichiCollapseCollapse
Daiwa BankDaiwa BankScandalScandal
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
10© 2002 SPARX Asset Management Co., Ltd.
Production and Inventory Cycle
……the domestic production cycle appears to have reached its bottomthe domestic production cycle appears to have reached its bottom
Source: METI.
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 1/2002
Production
Inventory
Inventory/Shipment Ratio
(year-over-year % chg; 3-month moving average)
Production Plan
11© 2002 SPARX Asset Management Co., Ltd.
Bank of Japan’s Quarterly Tankan Survey – Business Sentiment
Japanese business sentiment’s negative rate of change has slowed Japanese business sentiment’s negative rate of change has slowed
Source: BOJ
-80
-60-40
-20
0
2040
60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Electric Machinery (Large)
Electric Machinery (Mid)
Electric Machinery(Small)
12© 2002 SPARX Asset Management Co., Ltd.
Japanese Yen to US$ (GTIS) – Exchange Rate
The weakening yen will contribute to higher profit margins for The weakening yen will contribute to higher profit margins for manufacturing companiesmanufacturing companies
Source: DatastreamFrom 7/1/92 to 8/1/02 weekly
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200270
80
90
100
110
120
130
140
150
13© 2002 SPARX Asset Management Co., Ltd.
Bank Cross-Share Holdings
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
14© 2002 SPARX Asset Management Co., Ltd.
Japanese Public Institutions: Asset Allocation
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
15© 2002 SPARX Asset Management Co., Ltd.
Price/Earnings Distribution – TSE 1 vs. OTC
In this environment valuations have fallen to extremely attractive In this environment valuations have fallen to extremely attractive levelslevels
0 5 10 15 20 25 30 35 40 45 50 55 60 Over
Source: SPARX
0 5 10 15 20 25 30 35 40 45 50 55 60.0x Over
TSE1 OTCTSE1 OTCTSE1 OTC
0%
5%
10%
15%
20%
25%
0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 35.0x 40.0x 45.0x 50.0x 55.0x Over
As of Dec. 28, 2001
62% of OTC companies are selling less than 15.0x62% of OTC companies are selling less than 15.0x
28% of TSE1 companies are selling less than 15.0x28% of TSE1 companies are selling less than 15.0x
16© 2002 SPARX Asset Management Co., Ltd.
Price/Book Value Distribution – TSE1 vs. OTC
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
0%
5%
10%
15%
20%
25%
30%
35%
40%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 6.0x Over
TSE1 OTCTSE1 OTCTSE1 OTC
80% of OTC companies are selling less than 1.0x80% of OTC companies are selling less than 1.0x
76% of TSE1 companies are selling less than 1.0x76% of TSE1 companies are selling less than 1.0x
17© 2002 SPARX Asset Management Co., Ltd.
The 3-Year Cycle
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
*Average Outstanding
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%Money Supply
(M2 + CD)*
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20028,00010,00012,00014,00016,00018,00020,00022,00024,000
+51%
-33%
+56% -
43%
+62%
-54%
NIKKEI 225 – Price Index
June 9421,552.81
July 9514,485.41
June 9622,666.8
Oct 9812,879.97
April 0020,833.21
Sept 019,504.41
Source: Datastream
Aug 9214,309.41
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.