Sparx ‘Rising Sun’ Leads Japan Small Cap Funds With 26% Return

Date: Thursday, December 3, 2009
Author: Tomoko Yamazaki and Shunichi Ozasa, Bloomberg

Sparx Asset Management Co.’s Tadahiro Fujimura led a 26 percent return for his Rising Sun fund this year, the best performer in the Asian market with the worst returns for smaller companies.

The 1.2 billion yen ($14 million) fund, also known as Sparx Japan Small Cap Fund, ranks top among the 25 funds that invest in the nation’s small-cap stocks, according to Bloomberg data.

Japan’s small caps, which generate about 80 percent of sales in the domestic market, stand to benefit as a surging yen cuts costs, Fujimura said. The fund’s top holdings as of the end of October were mobile-phone service provider MTI Ltd. and Next Co., a real estate information company.

“Japan is undergoing major changes and the smaller, emerging companies will see the biggest growth going forward,” said Fujimura, 45, who has invested in the market for Japan’s smaller companies for more than a decade. “Picking those that are going to survive is as difficult as winning the lottery.”

The Jasdaq Stock Index, the benchmark for Japanese small caps with a median market capitalization of $31 million, is down 4.6 percent this year, the fourth-worst performer among 344 indexes in Asia.

The Rising Sun fund, started in October 2000, invests in companies with market capitalizations in the bottom 30 percent of listed firms. It had stakes in 54 companies as of Oct. 15, with 60 percent of them being those that depend on domestic demand.

MTI, which provides voice mail and text content services for mobile phones, and Next were selected as they were judged cheap on gauges such as price-earnings ratios, Fujimura said. Both Tokyo-based firms have doubled in value this year.

Domestic Focus

Small caps will benefit from the stronger yen, which rose to a 14-year high against the dollar last week, through cheaper import prices, Fujimura said. Domestic-focused small companies also are sheltered from losses on repatriated earnings faced by major exporters.

Companies such as Tact Home Co., a homebuilder, and Epco Co., a designer of water systems for residential buildings, both based in Tokyo, may see increased demand from the government’s tax incentives for purchasing houses as well as a trend to build more ecologically friendly homes, Fujimura said.

Still, there were opportunities in some export-orientated small caps with earnings growth, Fujimura said. Companies such as Fujitsu General Ltd., which makes air-conditioning units, have strong brands in the Middle East and Europe, he said.

The financial problems at state-run Dubai World wouldn’t lead to a bigger crisis in financial markets, Fujimura said.

Market Rout

Dubai’s government said last week that Dubai World would seek a standstill agreement with creditors and an extension of loan maturities until at least May 30, 2010. The announcement led to the biggest declines in Asian shares in three months and Europe’s worst rout since April.

“It was only natural for us to see some sort of correction in the market after the recent run-up,” Fujimura said. “I’m still betting that we will see small-cap stocks continue having a good run for another couple of years.”

Sparx Asset is the investment arm of Sparx Group Co., Asia’s biggest hedge-fund firm. Total assets managed by Sparx have dropped more than 60 percent from an August 2006 peak, and stood at 631 billion yen as of October.

Bloomberg defines small-cap companies as those with a market capitalization of less than $1 billion.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Shunichi Ozasa in Tokyo at sozasa@bloomberg.net