Interim Management Statement (9470G)

TIDMPJF

RNS Number : 9470G

Prospect Japan Fund Ld

19 May 2011

THE PROSPECT JAPAN FUND LIMITED

Prospect Japan Fund Interim Management Statement

For the period 1 January 2011 to 31 March 2011

 
Key Figures 
 NAV Performance (USD) % 
              1st Quarter  YTD   1 Year  5 Year 
Fund          -1.1         -1.1  15.8    -62.6 
Topix Small   -5.4         1.2   10.6    -19.0 
 
 
                    May 13, 2011 
Bloomberg           PJF LN 
Yen / USD           82.8 
NAV (USD)           0.9 
Price (USD)         0.8 
Premium/ Discount 
 %                  -17.9%

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 first quarter of 2011, the biggest news from Japan occurred on 11 March, a massive 9.0 Tohoku-Pacific Earthquake/Tsunami centered off of Sendai, about 300 kilometers northeast of Tokyo. The resulting widespread loss of life, devastation and nuclear emergency caused by the earthquake and tsunami heavily impacted the Japanese markets. For the period ending 31 March 2011 the Fund was down -1.1 vs. the Topix Small Index performance of -5.4.

Fortunately most of the Fund's holdings were remarkably unscathed by the event. However, there are supply chain interruptions, delays in production, and business disruptions due to rolling blackouts that went into effect for a time after the earthquake, and ongoing electricity supply constraints.. Many of the Fund's holdings have fiscal March year-ends, so most of the impact will be accounted for in this fiscal year. As for the J-REITs, there was minimal damage to the properties in their portfolios.

The Fund's top performers for the quarter were Tomoe Corporation (1921), Yasuragi (8919) and Fintech Global. Tomoe Corporation constructs steel structures and school related facilities, long-span projects, bridges, electric pylons and gymnasiums. Tomoe Corporation was cited in the 'Kabushiki Shimbun' - a financial newspaper - as a reconstruction beneficiary. Fintech Global is a financial services company. Yasuragi recently announced full year earnings for fiscal year January 2011, with sales -16.1% YoY and recurring profits +910.8% YoY. Sales declined due to lower average selling price per unit (used detached homes); however profits surged resulting from the elimination of losses in the income producing property segment. Fintech bought back a convertible bond, which was used as short-term bridge financing. The implied return on the investment for the Fund was an annualized 17%.

Next (2120 - real estate information services) and Invincible Investment Corp. (8963 - REIT) were laggards for the Fund. Next revised their pricing plan in which real estate agents pay to place real estate listings on the Next website and mobile phone applications. Next expected monthly sales volatility as real estate agents adjusted to the new pricing plan, however sales did not meet internal forecasts and the company announced a downward revision to sales and profits. Monthly sales figures improved slightly after bottoming in December, but have remained largely flat during 1Q 2011. Invincible Investment suffered from severe interest rate hikes for their financing and large losses on sale of properties to repay debt, which resulted in a sharp reduction in dividends per unit. Management is actively pursuing new sponsorship as a means to securing market level interest rates on refinanced debt.

Since the end of the first quarter, the Fund gained 3.4% in April compared to the Topix Small Index' -2.3% performance. The index peaked at the end of March following the Tohoku earthquake and has traded down since. Full year earnings announcements are in full swing; thirteen of the Fund's holdings announced results since the first of April. Most of the estimates are on the conservative side, citing a slow start after the Tohoku earthquake. Eight of the thirteen companies posted extra-ordinary losses stemming from the Tohoku earthquake, however only two companies had losses that accounted for slightly more than two percent of total sales, and the losses at the rest were negligible.

April's positive divergence between the Fund's performance and that of the Topix Small Index was attributed to gains from a convertible bond position in Azel Corporation, a condominium developer that went bankrupt. The court decided on a final valuation for Azel, allowing the valuation to be marked upwards. Negative performance at Tri-Stage Inc. (2178) and Tomoe Corporation (1921) weighed on performance. Tri-Stage (2178) provides direct marketing services for clients primarily via television shopping. Tri-Stage sales were affected in March, when television viewers spent little time on shopping, instead focusing on news related to the Tohoku earthquake and subsequent tsunami. Monthly sales in March were -6.9% year-on-year. Tomoe which experienced a sharp increase in its stock price following the Tohoku earthquake as noted above issued guidance for fiscal year March 2012 which is weaker than hoped for, since the company does not have firm orders for earthquake construction.

J-REIT Highlights

The devastating Great Tohoku-Pacific Earthquake had little impact on J-REIT portfolios. Property in the affected areas constitute less than 2% of J-REITs total assets, and there have only been reports of minor damage to those properties.

Despite that reality, the J-REIT market ended the month of March down -4.7% month-on-month, after falling as much as -16.3% immediately following the earthquake. This compares with the Nikkei 225's -8.2% March performance (and a low of 19.0%). The TSEREIT index is down -6.7% for the quarter, compared to the Nikkei 225 index decline of -4.6%. The highest profile effect of the earthquake on J-REITs was the suspension of scheduled equity issuances by United Urban Investment (8960) and Invincible Investment (8963).

During the quarter the Bank of Japan continued its purchase program. The programs targeted purchase amount was doubled after the earthquake and now calls for an eventual JPY 100 billion in J-REIT units to be purchased by year-end. During the quarter six J-REITs (Nippon Building Fund (8951), Japan Excellent (8987), (3226 Nippon Accommodation Fund, 8968 Fukuoka REIT and 3249 Industrial & Infrastructure Fund)) announced new equity issuances, totaling JPY 85.6 billion to be used for new property purchases. During the quarter, J-REITs announced over JPY 283 billion in acquisitions with JPY 54.6 billion in dispositions.

While the aftermath of the Tohoku earthquake continues to dominate Japanese headlines, most J-REITs have quietly returned to business as usual. After two planned equity issuances were cancelled in the wake of the disaster, Nippon Hotel Fund (8985) completed a JPY 3.6 billion private placement early in the month, the first success post-quake issuance.

In April, tThe J-REIT index rose +1.7% month-on-month, versus the Nikkei 225's +1.0% performance. April was a slow month for J-REIT transactions, with only one new acquisition announcement for JPY 2.1 billion, and two dispositions announced totaling JPY 8 billion. As of the end of April he TSEREIT index has fallen -5.1% ytd, compared to the Nikkei 225 index decline of -3.7% ytd.

Principal Risks and Uncertainties

In response to the largest earthquake ever recorded in Japan, the Bank of Japan announced on 14 March that it increased its asset purchase from JPY 5 trillion to JPY 10 trillion. This program is aimed at reducing risk premiums and increasing investor confidence through acquisition of exchange traded funds, J-REITs, Japanese Government Bonds and Corporate Bonds. Also, in an effort to weaken the currency, which rose rapidly following the quake and reached post-war highs threating to further hinder the economy, the Ministry of Finance announced the sale of JPY 692.5 billion in March. The massive recovery/reconstruction task prompted discussions in the government to postpone or cancel the plan to lower corporate tax rates by 5% to help pay for the rebuilding effort. Domestic consumption will be tempered for several months as a result of the earthquake.

The earthquake's impact on Japan's power generation in the northeastern half of Honshu will also impact the economy. The earthquake and loss of the Fukushima nuclear power plants will reduce electricity by as much as 25% during peak demand this summer. Concerns on supply chain interruptions remain. Also, unrest in Northern Africa and the Middle East, and the prospect of global economic recovery make the price of oil a concern. As higher prices will no doubt affect input prices as Brent crude increased 10% in February. The big question remains; will this create an inflationary environment positive to the Japanese economy or will higher oil prices restrict consumer discretionary spending?

Japan's credit rating was cut by Standard & Poor's to AA minus from AA on 27 January. Standard & Poor's outlook for Japan is 'stable'. The credit ratings agency commented that the Democratic Party of Japan lacks a consistent strategy for dealing with Japan's debt problem. This added to the continuing political pressures for Prime Minister Naoto Kan. The pressures continue to mount, with his handling of the earthquake and nuclear emergency adding to other issues he faces, such as his foreign minister quitting over an illegal donation.

Two months after the Tohoku earthquake, questions remain about the impact on future earnings in corporate Japan. The spirit of 'jishuku' or voluntary self-restraint is slowly coming to an end and signs of increased consumption are evident. Tokyo was uncharacteristically busy during Golden Week, since many residents opted to stay closer to home rather than traveling abroad. A family visit to Disneyland witnessed busy theme parks and crowded souvenir shops. As summer approaches, companies have been asked to reduce electricity usage, regulating office temperatures to 29 degrees Celsius. On a positive note, the Tohoku bullet train re-opened which brings access to much needed supply lines. The Tohoku region accounts for roughly 4% of Japan's gross domestic product. The Ministry of Land, Infrastructure, Transport and Tourism says that Tohoku represents 4.9% of exports and 3.3% of imports. Transportation was re-established faster in the Tohoku region compared to the three months it took to reopen transportation in and around Kobe following the Kobe earthquake.

The question of how to pay for the reconstruction looms large. On 2 May, Japan's parliament passed a 4 trillion Yen (US$49 billion) budget for rebuilding. Prime Minister Kan has said that several extra budgets may be needed, as reconstruction estimates have been as high as 25 trillion Yen.

Top 10 Portfolio Holdings

 
 As of 31 March 2011                           % 
 
 1921   TOMOE CORP                          12.1 
 2533   OENON HOLDINGS INC                  10.6 
 2178   TRI-STAGE INC                        9.7 
 3141   GROWELL HOLDINGS CO LTD              9.7 
 8919   YASURAGI                             9.2 
 9304   SHIBUSAWA WAREHOUSE CO LTD/THE       7.8 
 8963   INVINCIBLE INVESTMENT CORP (REIT)    7.7 
 3397   TORIDOLL.CORP                        4.0 
 6279   ZUIKO CORP                           3.5 
 8205   SHAKLEE GLOBAL GROUP INC             2.9 
 
 
 Sector Weightings 
 As of 31-March 11 % 
 
   Advertising                        9.7 
   Beverages                         10.6 
   Diversified Financial Services     0.4 
   Engineering & Construction        12.1 
   Healthcare-Services                2.8 
   Internet                           1.8 
   Investment Companies               2.1 
   Machinery-Diversified              3.5 
   Pharmaceuticals                    0.6 
   Real Estate                       11.9 
   REITs                              8.6 
   Retail                            19.5 
   Storage/Warehousing                7.8 
  Top 10 Portfolio Holdings 
   As of 30 April 
    2011                                                          % 
  1921      TOMOE CORP                                  11.3 
            OENON HOLDINGS 
  2533      INC                                         10.4 
            GROWELL HOLDINGS 
  3141      CO LTD                                       9.9 
  2178      TRI-STAGE INC                                9.8 
            SHIBUSAWA 
            WAREHOUSE CO 
  9304      LTD/THE                                      8.9 
  8919      YASURAGI                                     8.9 
            INVINCIBLE 
            INVESTMENT CORP 
  8963      (REIT)                                       7.8 
  3397      TORIDOLL.CORP                                4.4 
  6279      ZUIKO CORP                                   3.8 
  1872CB12  AZEL CB 4% 2012                              3.7 
 
  Sector Weightings 
  As of 30-April 11 % 
  Advertising                    9.8 
   Apparel                        1.9 
   Beverages                     10.4 
   Engineering & Construction    11.3 
   Healthcare-Services            2.4 
   Internet                       1.8 
   Investment Companies           2.3 
   Machinery-Diversified          3.8 
   Pharmaceuticals                0.5 
   Real Estate                   15.5 
   REITs                          7.8 
   Retail                        20.2 
   Storage/Warehousing            8.9 
  ----------------------------

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 between 31 March 2011 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:

Kelly Moore-Vieira

Phone: +44 (0) 1481 745618

This information is provided by RNS

The company news service from the London Stock Exchange

END