Interim Management Statement
November 18 2010 - 11:42AM
UK Regulatory
TIDMPJF
RNS Number : 4570W
Prospect Japan Fund Ld
18 November 2010
THE PROSPECT JAPAN FUND LIMITED
The Prospect Japan Fund is a closed-end investment company incorporated in
Guernsey, and listed on the London Stock Exchange. The Company's investment
objective is to achieve long-term capital growth from a portfolio of securities
primarily of smaller Japanese companies Listed or traded on Japanese Stock
Markets. Past performance is no indication of future results.
Prospect Japan Fund Interim Management Statement
For the period 1 July 2010 to 30 September 2010
+----------+----------+-------+----------+--------+
| Key Figures |
| |
| NAV Performance (USD) % |
+-------------------------------------------------+
| | 3rd | YTD | 1 Year | 5 |
| | Quarter | | | Year |
+----------+----------+-------+----------+--------+
| Fund | 3.70 | 10.53 | 15.07 | -57.79 |
+----------+----------+-------+----------+--------+
| Topix | -4.11 | 6.30 | -2.84 | -11.79 |
| Small | | | | |
+----------+----------+-------+----------+--------+
+------------+---------+
| Bloomberg | PJF LN |
| | |
+------------+---------+
| Yen / USD | 83.32 |
+------------+---------+
| NAV (USD) | 0.8409 |
+------------+---------+
| Price | 0.605 |
| (USD) | |
+------------+---------+
| Premium/ | -28.05% |
| Discount % | |
+------------+---------+
Prospect Japan Fund inception date is 20 December 1994. Above performance of the
Fund is net of fees and expenses and includes reinvestment of dividends and
capital gains. Topix Small performance is the total return including the
reinvestment of dividends into the Index denominated in USD. Topix Small Cap
Index (TPXSM) performance cited above is the total return including the
reinvestment of net dividends into the index denominated in US Dollars (Source:
Bloomberg )
Investment Manager's Summary
For the third quarter, the Fund (+3.7%) outpaced the Topix Small Index (-4.1%).
This was despite the Yen's 6% appreciation versus the US Dollar in the third
quarter.
Corporate profit recovery is currently overshadowed by the continued strength of
the Japanese Yen. In mid-September, the Ministry of Finance stepped into the
foreign exchange market in an attempt to stem the tide of the strengthening Yen.
The intervention was the first since March 2004 but only provided a brief pause
in the Yen's ascent, and once again the Yen is moving towards the 80 Yen per US
dollar level.
Positive performance within the fund was led by the J-REIT sector, followed by
the beverage and retail sectors. The Fund continues to invest in J-REIT names
that are trading well below their break-up value and commonly are trading at the
highest implied capital ratios. Implied capital ratio is calculated as follows:
net operating income divided by (market capitalization plus net debt).
Oenon Holdings is increasing its market share in the private label rice wine
business by supplying large general merchandisers with traditional Japanese
distilled rice wine. Oenon's share performance for the quarter was +3.4%.
Growell Holdings, a drug store chain, continues to lead the sector in monthly
sales growth with ten out of twelve months of positive same-store-sales figures.
Growell reported robust full year figures for fiscal year August 2010 (sales
+20% year-on-year, operating profit +39.9% year-on-year), relying on organic new
store growth and a successful merger and acquisition platform. Growell shares
gained +7.2% for the quarter.
Underperformance came from Tri-Stage (direct marketing) and Takefuji (non-bank
finance). Tri-Stage provides television programs and commercials for direct
marketing of products. The company revised down full year earnings estimates
due to higher input costs. Takefuji filed for bankruptcy at the end of
September; however our holding is in the corporate bond, which will allow us to
realize some return on investment.
The Bank of Japan held a policy board meeting on October 4-5 at which it decided
on three measures: 1) a return to zero interest rate policy; 2) clarification of
the time horizon through 2012; 3) the establishment of an asset purchase
program. The Bank explained the widely expected move was due to increased
uncertainty for the U.S. economy, the stronger yen and weaker share prices. The
asset purchase program had an immediate positive impact on real estate and
J-REIT shares.
The current state of the market is reminiscent of 2003, when the market
recovered on the back of bank lending to real estate. Real estate stocks appear
to have bottomed after purging their inventory. In the condominium segment,
inventories are at 15 year lows and have bottomed out at the 4,722 unit range
(greater Tokyo metropolitan area). Condominium inventories fell 31%
year-on-year in September while condominium prices increased 5% year-to-date,
showing that continued brisk demand is leading to a further drop in inventory.
Demand should continue with improved affordability on the back of lower interest
rates. Office vacancies have reached peak levels and while they probably will
not improve dramatically in the near future, vacancy rates should flatten out.
In meetings with real estate companies, representatives say that the biggest and
middle tier developers are being extended loans. Smaller scale developers, due
to risk averse banks, will probably have to wait up to one year for banks to
ease lending.
J-REIT Highlights
Japan Single Residence was merged with Heiwa Real Estate REIT on October 1,
2010. Japan Single's share price rose +7.7% for the quarter, with a bullish
move post merger announcement.
There were a few positive signs that hint towards continued maturation of the
sector. Bloomberg news reported that the vice minister of the MLIT (Ministry of
Land, Infrastructure, Transport and Tourism) commented on a potential softening
of J-REIT dividend payout ratio requirements, currently set at more than 90% of
profit in order to maintain tax-free status. The vice minister also commented on
permitting J-REIT issuances of convertible bonds. Alone or in tandem, these
changes could allow J-REIT's more flexibility in financing, and stability in
dividend levels.
J-REIT property transaction continued, with Y66.0 billion in acquisitions
announced during the period, along with Y80.0 billion of dispositions. Lenders
continue to show heightened willingness to lend for real estate acquisitions,
exemplified in Mizuho Trust & Banking new non-recourse loan scheme, allowing
J-REITs to procure loans based on the quality of the acquired property instead
of credit worthiness of the sponsor.
The BOJ purchase plan has been the moving force in the market since its
announcement on 4 November 2010. With the announcement of details, eligible
J-REITs have understandably been outperformers, with other J-REITs giving back
some gains. We believe that the additional stability will serve as a positive to
the sector in the mid-term.
Principal Risks and Uncertainties
Japan continues to grapple with deflation and headlines about the surging
Japanese Yen versus the US dollar are bound to invite questions about corporate
profitability in Japan and its competitive advantage. Although we see what
appear to be alarming headlines, corporate profits are on the upswing and
Japanese companies are learning how to streamline their businesses. In
addition, the fund is focused on domestic demand and benefits from a rebound in
the real estate and J-REIT sectors, which are not directly linked to currency
fluctuations. Principal risks to the fund include a sudden increase in the
unemployment rate that has been stable at 5.0% in September 2010, down from a
peak of 5.6% in July 2009. Credit concerns in the J-REIT space have calmed down
on the whole, however a sudden credit tightening at Japanese banks could put
affect the smaller J-REIT's ability to source funding for refinancing.
Portfolio Holdings
+---------+---------------------------------------+-------+
| | Top 10 Holdings as of 30-Sept-10 | % |
+---------+---------------------------------------+-------+
| 2533 | OENON HOLDINGS INC | 10.5 |
+---------+---------------------------------------+-------+
| B1P76B5 | FINTECH GLOBAL EURO YEN CB 02/08/2012 | 9.9 |
+---------+---------------------------------------+-------+
| 9304 | SHIBUSAWA WAREHOUSE CO LTD/THE | 8.6 |
+---------+---------------------------------------+-------+
| 8970 | JAPAN SINGLE RESI (REIT) | 8.5 |
+---------+---------------------------------------+-------+
| 1921 | TOMOE CORP | 7.5 |
+---------+---------------------------------------+-------+
| 3141 | GROWELL HOLDINGS CO LTD | 7.3 |
+---------+---------------------------------------+-------+
| 8919 | YASURAGI | 6.9 |
+---------+---------------------------------------+-------+
| 3397 | TORIDOLL.CORP | 6.0 |
+---------+---------------------------------------+-------+
| 2178 | TRI-STAGE INC | 5.1 |
+---------+---------------------------------------+-------+
| 8986 | JAPAN RENTAL HOUSING (REIT) | 5.1 |
+---------+---------------------------------------+-------+
| | | |
+---------+---------------------------------------+-------+
Portfolio Allocation
+-----------------------------------------------+-------+
| Sector Weightings as of 30-Sept-10 | % |
+-----------------------------------------------+-------+
| Advertising | 5.1 |
+-----------------------------------------------+-------+
| Internet | 2.6 |
+-----------------------------------------------+-------+
| Retail | 20.4 |
+-----------------------------------------------+-------+
| Storage/Warehousing | 8.6 |
+-----------------------------------------------+-------+
| Beverages | 10.5 |
+-----------------------------------------------+-------+
| Healthcare-Services | 4.5 |
+-----------------------------------------------+-------+
| Pharmaceuticals | 2.3 |
+-----------------------------------------------+-------+
| Real Estate | 9.8 |
+-----------------------------------------------+-------+
| REITs | 13.9 |
+-----------------------------------------------+-------+
| Engineering & Construction | 7.5 |
+-----------------------------------------------+-------+
| Investment Companies | 1.9 |
+-----------------------------------------------+-------+
| Diversified Financial Services | 10.1 |
+-----------------------------------------------+-------+
| | |
+-----------------------------------------------+-------+
| Total** | 97.1 |
+-----------------------------------------------+-------+
| No of Positions | 25 |
+-----------------------------------------------+-------+
Percentage weightings are Prospect Asset Management's internal calculations and
have not been reconciled by the administrator. Results of calculations as
presented may not be exact due to rounding and precision of stored values.
Other than those matters disclosed in this statement, the board is not aware of
any significant events or transactions which have occurred since 30 September
2010 and the date of this report which would have a material impact on the
financial position of the company.
Enquiries:
Prospect Asset Management, Inc.
Contact:
Hamilton Smith
Phone: +1-808-955-7078
Northern Trust International Fund Administration Services (Guernsey) Limited
Contact:
Tracy Lewis
Phone: +44 (0) 1481 745363
This information is provided by RNS
The company news service from the London Stock Exchange
END
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