Interim Management Statement (9956Q)

TIDMPJF

RNS Number : 9956Q

Prospect Japan Fund Ld

27 October 2011

Prospect Japan Fund Interim Management Statement

For the period 1 July 2011 to 27 October 2011

 
Key Figures 
 
 NAV Performance (USD) % at 30 September 2011 
                3(rd) Quarter    YTD    1 Year  5 Year 
Fund            -2.17            1.12   7.14    -57.75 
Topix Small     -1.69             5.03  16.09   -2.78 
 
 
Bloomberg           PJF LN 
Yen / USD           76.69 
NAV (USD)           0.90 
Price (USD)         0.72 
Premium/ Discount 
 %                  -20.40%

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

The Fund was down 2.17% versus the Topix Small Index' -1.69% for 3(rd) quarter 2011. The 3(rd) quarter started off with a strong July in which the Fund was up 4.35% on the back of a change in sponsor in the J-REIT sector. Japanese companies used excess cash on their balance sheet to buy back their own shares. First quarter earnings were subdued, an expected result considering supply chain disruptions after the 11 March earthquake and tsunami. In August, the Fund was down 1.04%. Despite the negative performance, we were encouraged by a pick-up in management buyouts at significant premiums to the last traded price. September was a painful month for global equities and the Fund was down 5.26%. Foreigners were net sellers in September. The market decline was due in large part to global uncertainty, fears of European financial collapse, a possible recession in the United States and the impact these events will have on Japanese corporate profits.

Positive performance

Gro-Bels (3528), a condominium developer, reached a 52-week high on 28 July when the stock hit JPY 63. There was no news announced in July behind the strong move. First quarter results were announced on 5 August, showing year-on-year declines in sales and operating profitability. Full year estimates call for sales growth of 28.9% and operating profit growth of 89.7%. The company announced a third party allotment on 12 September; the company issued 8 million shares, raising 280 million Yen to fund land acquisitions.

Toridoll (3397), a restaurant chain featuring Japanese style noodles, achieved strong first quarter results in August. Sales increased by 25% year-on-year and operating profits jumped 36%. Toridoll was highlighted in a television program in June. The television promotion along with a new menu created positive same store sales in June, July and September. Same store sales this fiscal year were positive for 3 out of 6 months compared to only one out of twelve months last fiscal year.

Oenon Holdings (2533), a producer of Japanese rice alcohol, revised first half operating and recurring profit forecasts on 29 July. First half sales were flat and operating profits gained 53.2% year-on-year due to lower marketing fees and depreciation expense.

Growell Holdings (3141) announced full year results for fiscal year ending August 2011; sales +13.4% and operating profit +41.6%. The company conservatively estimates next year sales and profit growth of 10%.

Negative performance

Invincible Investment Corporation (8963), a diversified J-REIT, has lagged the market even after announcing a change in sponsor in July. The market reaction to the new sponsor was immediately positive, albeit short lived. In the June 2011 period, Invincible ended the period with a JPY 1.3 billion net loss due to impairment costs. Forecasts for the current 6-month period are for net losses on high financing costs related to debt restructuring.

Tri-Stage (2178), a company engaged in planning and support in television shopping, produced positive sales growth for the first quarter but was negatively impacted from the 11 March earthquake and tsunami. Cancellations of television commercials post-earthquake impacted sales by JPY 840 million and gross profits by JPY 250 million. The company announced weak sales figures for August (-8.8% year-on-year), marking the third consecutive month of negative sales growth.

Yasuragi (8919), the largest seller of reformed detached homes in Japan, revised sales and profit forecasts downward for the half-year and full year. Sales of used detached homes were down -24% year-on-year through September.

Next (2120) - monthly rental and real estate sales in September declined 20.7% year-on-year, but was up 2.4% month-on-month. The company introduced a new pricing plan for their web-based portal, which was not received well by the market.

There has been a flurry of management buyouts announced. Japanese managers are utilizing excess cash on the balance sheet to take advantage of historically low price-to-book ratio. Topix' price-to-book ratio was 0.94x at the end of September, one of only a handful of times since 1965. Share buybacks have already exceeded last year's buybacks by 30%.

Earthquake rebuilding is predominantly in the clean-up stage. The rebuilding costs are expected to reach JPY 23 trillion over a ten-year period. The total cost is double what it cost to rebuild after the Great Hanshin Earthquake of 1995. The government has drafted a third supplementary budget and a reconstruction surtax. The JPY 12 trillion budget includes JPY 9 trillion for reconstruction. The financing is likely to be garnered from a reconstruction surtax totaling JPY 9-11 trillion. The surtax is spread over corporate, income, tobacco and residential taxes. Also, in October the Japanese government announced that they will sell about JPY 1 trillion of reconstruction bonds to individual investors.

Corporate earnings are expected to be weak this year and are widely priced into the market; Toyo Keizai forecasts for Tokyo Stock Exchange First Section companies (non-financial) call for sales to increase 3.9% and recurring profits to decline 3.3% in fiscal year March 2012. What the market lacks at this moment is any optimism based on Toyo Keizai's March 2013 optimism that sales will grow 4.3% and recurring profits will increase 14.2%. However, earnings estimates revisions favour upward over downward revisions. Toyo Keizai data shows that for Tokyo Stock Exchange First Section companies, 21 companies announced upward revisions and 11 downward revisions. As for Second Section listed companies, there were 4 upward revisions and 1 downward revision.

J-REIT Highlights

The 3(rd) quarter was very active for the J-REIT market, with several capital raisings, The Bank of Japan actively supporting the market, and the resolution of the last remnant of post-Lehman credit worthiness issues. In the quarter, the TSEREIT performance was -9.6%,outperforming the -11.4% decline of the Nikkei 225.

In a positive sign of possible regulatory reform, a tax system revision allowing J-REITs to retain gains on asset sales was included in 2012 tax systems revision requests submitted by the FSA and MLIT. The revision would allow these gains to be excluded from the requirement to distribute more than 90% of profits.

With the 15 July announced sponsorship change at Invincible Investment (8963) the last major creditworthiness problem in the J-REIT market has been resolved. Initial market reaction was positive, despite the 111.8% dilution to shares outstanding on the JPY 7 billion in new capital. The new sponsor is Fortress Investment Group. Unit prices fell in the second half of the quarter, as interest rates remain high and remaining negative goodwill used to stabilize dividends will be depleted at years end.

B-Life Investment (8984), a residential J-REIT sponsored by Daiwa House Industry (1925), announced a public offering of 41,800 new units (35.2% dilution) for an estimated JPY 17.6 billion. The proceeds were used to acquire 4 properties for JPY 15.7 billion.

Kenedix REIT (8972) also raised capital during the month with a JPY 16.4 billion public offering of 53,000 new units (22.7% dilution). The proceeds were used for property acquisitions and debt repayment.

Japan Retail Fund (8953), the largest retail focused J-REIT, announced a capital raising public offering of 192,000 new units (11.4% dilution) for an estimated JPY 19.2 billion. The proceeds went towards the acquisition of 12 properties with a total cost of JPY 46.0 billion.

Japan Prime Realty Investment (8955) announced the issuance of two corporate bonds for a combined JPY 9.0 billion, bringing the number of new bond issuances to ten for the year.

There were a total JPY 181.3 billion in property acquisitions announced during the 3(rd) quarter, along with JPY 58.2 billion in sales. Thus far in October there has been an additional JPY 14.1 billion of acquisitions announced with no announced sales.

BoJ Asset Purchase Program

The Bank of Japan was active during the quarter, increasing the total size of its Asset Purchase Program from JPY 10 to JPY 15 trillion, with J-REIT equity to comprise JPY 110 billion (up from JPY 100 billion). BOJ also lengthened the maturity of the program by six months to the end of 2012. The BOJ has now used over half of the available amount, purchasing a total of JPY 58.3 billion as of 14 October, 2011.

The TSEREIT index ended the quarter down 17.9% year to date through 30 September 2011, underperforming in comparison with the Nikkei 225 index' 14.9% performance over the same period.

Top 10 Portfolio Holdings(As of 30 September 2011)

 
                                               % 
 2533   OENON HOLDINGS INC                  11.2 
 1921   TOMOE CORP                          10.8 
 9304   SHIBUSAWA WAREHOUSE CO LTD/THE      10.5 
 2178   TRI-STAGE INC                       10.3 
 8963   INVINCIBLE INVESTMENT CORP (REIT)   10.0 
 3141   GROWELL HOLDINGS CO LTD              9.8 
 8919   YASURAGI                             7.4 
 6279   ZUIKO CORP                           5.1 
 3528   GRO-BELS CO LTD                      3.8 
 8205   SHAKLEE GLOBAL GROUP INC             3.3

Sector Weightings(As of 30 September 2011)

 
                                      % 
 Advertising                       10.3 
 Apparel                            2.8 
 Beverages                         11.2 
 Diversified Financial Services     0.3 
 Engineering & Construction        10.8 
 Healthcare-Services                0.8 
 Internet                           2.0 
 Investment Companies               3.8 
 Machinery-Diversified              5.1 
 Real Estate                        9.4 
 REITs                             16.1 
 Retail                            15.8 
 Storage/Warehousing               10.5

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 30 September 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