Performance Review 2006
Tadahiro Fujimura: "The Fund decreased by -8.07% in Year 2006 while the benchmark was down by -4.26%.We believed that individual consumption may be the driver of the Japanese economy on back of the increase in wages. Also, we had a view that companies were beginning to spend on capital equipment as their retained earnings continue to build up. We were optimistic about housing related industries, though explicit demand had not emerged with potential buyers concerned about a potential interest rate hike, consumption tax increase and rising real estate prices. Under this environment, we maintained a positive view on domestic oriented names such as construction, housing, service, as well as software that had less probability to experience selling pressure and had more up-side potential.
In year 2006, the Japanese Mid and Small cap markets experienced a sharp correction triggered by the “Livedoor Shock” in January. We saw a flight to quality as well as demand supply imbalance within the markets. The Fund’s major detractors were retailers and wholesalers which were sold off due to profit taking activities including Nafco (2790), a home center operator in southeast Japan. On the other hand, the major contributors were chemical companies including Stella Chemifa (4109) with good earnings momentum."
Performance Review 2007
Tadahiro Fujimura: "The Fund was down by -18.50% in Year 2007 while the benchmark was down by -14.56%.
We believed that a tightening labor market will eventually lead to increased wages and personal consumption. We also had a view that the preparations for the 2008 Beijing Olympics would lead to an increase in Chinese demand for the machinery sectors, and an ending to the recent decline of machinery orders.
The selling pressure especially within Japanese mid and small cap markets continued in 2007. Shares of electric appliances companies including Sanken Electric (6707) weighted on the Fund’s performance. Sanken Electric revised its earnings downward by more than -80% due to the slump in LCD backlight business. We believed that Sanken Electric was oversold, even when its stock price was down by -50% from the peak. We hold this position as we expect it to recover due to continued demand for energy-efficient products. On the other hand, one of the top contributing sectors was Services. The major contributor was Daiseki (9793), a major industrial waste treatment firm."
Performance Review 2008
Tadahiro Fujimura: "The Fund was down by -28.76% in Year 2008 while the benchmark was down by -34.55%.
Despite the slump in domestic consumption, we viewed that Japanese economy would improve amid signs of increasing wages and back-logs of construction orders. With the concerns over macro factors, we focused on Service-related names, which are less influenced by increasing commodity prices and Technology-related names, which could provide higher valued-added products.
The top contributor of the Fund was Culture Convenience Club Co., Ltd. (4756), the nation’s No. 1 video rental company, which posted better-than-expected earnings. The firm also benefited from a surge in video club membership growth. Shares of Pigeon Corporation (7956), a maker of baby products, also gained thanks to increasing demand from China. Meanwhile, Toshiba Machine Co., Ltd. (6104) was the worst performer, whose stock price slid on fears that capital spending will slow down."
Performance Review 2009
Tadahiro Fujimura: "The Fund was up by 13.50% in Year 2009 while the benchmark was up by 3.15%.
Companies continued to talk about the harsh market conditions and remained extremely cautious with the start of 2009, though we saw signs of recovery in the mid and small cap universe. We also believed the return of the Japanese individual investor bodes well for Japanese mid and small cap stocks.
Shares of electric-parts makers including FUNAI ELECTRIC CO. LTD. (6839), a maker of low-end electric appliances such as television sets and audio-video equipment, supported the Fund’s performance. Shares of FUNAI, which gets 70% of its sales from the U.S., rose on better-than-expected U.S. retail sales. Also, YUSHIN PRECISION EQUIPMENT CO., LTD. (6482), a leading manufacturer of factory automation equipment, contributed positively. Although, in our opinion, the fundamentals of the company have not changed, the firm’s share price was bid up on bargain hunting. On the other hand, consumer-related stocks such as Culture Convenience Club CO., LTD. (4756), the nation’s biggest video rental chain operator, and coffee shop chain operator DOUTOR-NICHIRES Holdings Co., Ltd. (3087) slumped on profit-taking activities after their shares in the earlier 2009 had risen beyond levels justified by their earnings outlook."
Performance Review 2010
Tadahiro Fujimura: "The Fund was up by 7.24% in Year 2010 while the benchmark was up by 0.47%.
We had a view that we should see clearer signs of an economic recovery in 2010 supported by a number of trends that would accelerate change in Japan. For Japan’s newly-elected Democratic Party, 2010 was a year of action where the government was expected to begin to deliver on its campaign promises. In terms of global matters, it was important to identify effective measures to reduce their dependence on oil for governments and companies. In this changing environment, we believed that the gap between those firms that are well-managed versus those that are not will be widened.
The Fund gained supported by the shares of the leading budget carrier Skymark Airlines Inc. (9204) benefiting from new government’s liberalization of the aviation industry and energy efficiency technology related names such as FUJITSU GENERAL LIMITED (6755) and Fuji Electric Holdings Co., Ltd. (6504). However, some domestic firms including wholesalers and retailers contributed negatively."
Performance 2011 - Year-to-Date
Tadahiro Fujimura: "The Fund fell -9.19% YTD as at the end of August 2011 while the benchmark was down by -6.37%.
We maintained the strategy to increase our exposure to manufacturers with higher earnings growth potential and reduce our defensive stock holdings. The portfolio has been positioned to be neutral on both domestic and overseas exposure.
Due to gains in the JPY as well as fears about the slowdown in the overseas economy, the Fund’s core holdings in the electric appliance makers weighed on the performance. Meanwhile, the exposure to domestic-related firms which are likely to benefit from reconstruction demand as well as the holdings in service industry firms, which are susceptible to the strong yen, performed well."
Performance since 2006
Tadahiro Fujimura over the period since the Fund’s inception in March 2001: "The Fund fell by -37.28% over the 5 year period ended August 2011 while the benchmark was down by -45.22%."
Investment Process and Strategy – How does the Fund Manager invest?
Philosophy:
The SPARX investment philosophy, “Macro is the Aggregate of the Micro”, emphasizes stock selection based on a direct-research approach and generally does not focus on economic or other macro trends. In the small cap area, macro factors are less important when spotting undervalued companies.
SPARX way of investment:
We view our investment as the participation in the narrowing of the value gap between a company’s intrinsic value and its market price. We determine intrinsic value through an established disciplined approach, which includes evaluating various factors such as market growth potential, management quality, and earnings quality.
Idea Generation:
Two approaches are used to uncover investment prospects at the first stages. First, we develop an investment idea or thesis within the team through our daily research activities and analysis in order to focus our research on a select universe of companies. Simply put, we develop an idea and verify it by researching companies. This is the idea behind investment-driven research. However, it is important to discuss the idea with the other fund managers as well as analysts to receive their feedback. This group discussion method insures that all relevant information and opinions can be considered. Secondly, to supplement the first approach, analysts and fund managers are given the freedom to research their own ideas or specific companies. This approach allows investment professionals to develop a case for their own ideas.
Portfolio Construction:
A variety of quantitative and qualitative screens ranging from business model viability to growth potential are applied and a core universe of 400-500 securities is created out of the available 3,600 companies total universe.
Of the total universe, approximately around 3,100 companies are included in SPARX data base which has been expanded by our analysts who have conducted thorough on-site research since 1989.
The core universe of about 400-500 names is comprised of securities that emerged from an intensive process that first begins with an analyst’s buy recommendation. Following this initial step, cross-sector research by multiple analysts, downside risk analysis and valuation attractiveness based on recent price performance as well as research meeting discussions are conducted.
The portfolio is constructed on a stock-by-stock basis using a bottom-up, fundamental approach. As a result, a position’s weight relative to its benchmark weight is not a significant consideration in the portfolio construction process. Portfolio construction is unconfined to benchmark or tracking error. Furthermore, the strategy does not limit the percentage of assets invested in any particular industry or sector.
The buy process begins with identifying a value gap between a company’s intrinsic value and its stock price. Next, a catalyst must be identified to narrow this gap. If these two steps are completed, we then consider the target investment´s liquidity risk as well as the current market environment prior to purchasing the security. Weight assignment to each name is primarily a function of potential upside, probability of achieving that upside, liquidity and the time horizon required.
Sell decisions are made when either of the following events occur: 1) the stock price appreciates to a level that we consider is significantly (or irrationally) higher than our assessment of the company´s intrinsic value, 2) the company´s business suffers from secular defects so that the durable competitive advantage is no longer warranted, 3) when we discover a new buy candidate whose risk/return profile is deemed attractive relative to our portfolio holdings. There is no “stop loss“ rule.
Investment Outlook
Tadahiro Fujimura: "We believe there is an increasing possibility that Japan Inc.´s fiscal first-half earnings may not improve. However, in our view, the good news is that a recovery in production and reconstruction demand will support the economy from the second half of this fiscal year. We know there will be numerous problems in Japan in the mid-term. However, with the resignation of Japanese Prime Minister Naoto Kan, we expect smooth passage of the reconstruction bills in a divided Diet which will hopefully help boost reconstruction demand in the short-term.
In our view, it is difficult to foresee an improvement in the Japanese equity market until October when interim corporate earnings are released. However, we expect to see an upward trend in the stock market towards the end of the year 2011 on expectations for a recovery in Japan and monetary easing in the U.S. and China.
Therefore, we believe now is the time to make changes to our portfolio and increase our exposure to those firms that are likely to see a sharp increase in their share prices with the potential uptick in the market towards year end. Based on this view, we believe now is a good opportunity to invest in semiconductor-related names and auto-related companies whose share prices have fallen sharply in the last few months. We also intend to increase our exposure to construction firms and raw-material-linked names that are tied to a pick up in reconstruction demand. We will also continue to invest in small cap names with low price-to-book valuations."
