Interim Management Statement (6945D)

TIDMPJF

RNS Number : 6945D

Prospect Japan Fund Ld

18 May 2012

Prospect Japan Fund Interim Management Statement

For the period 1 January 2012 to 18 May 2012

 
Key Figures 
 
 NAV Performance (USD) % 
 For the period 1 January 2012 to 31 March 
 2012 
--------------------------------------------------- 
               1st Quarter   YTD     1 Year  5 Year 
Fund           12.9          12.9    9.1     -60.2 
Topix Small    10.8           10.8   9.4     -35.5 
 
 
 
 May 11, 2012 
Bloomberg           PJF LN 
Yen / USD           79.97 
NAV (USD)           0.96 
Price (USD)         0.80 
Premium/ Discount 
 %                  -16.44%

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 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 had a positive start to the year in the first quarter of 2012. For the period ending 31 March 2012, the Fund was up +12.9%, topping the Topix Small Index's gain of +10.8%. In a year following two natural disasters (The Great East Japan Earthquake and Thailand flooding) that adversely impacted Japan, we are thankful that nature has taken it easy on us this year. Investors welcomed a weaker currency as the Japanese Yen weakened -5.8% to the US Dollar in the three months to 31 March 2012, hitting a high of 83.6 Yen to the dollar on 20 March. However, with sovereign debt woes in Europe and muted recovery in the United States, the Yen again breached the 80 Yen mark in the first week of May which in turn is causing weakness in Japanese equity markets.

The majority of holdings provided positive performance for the quarter, with Yasuragi (8919), Growell Holdings (3141) and Shibusawa Warehouse (9304) comprising the bulk of the gains. Yasuragi, a real estate brokerage firm focusing on the refurbishing and selling of second-hand single-family homes, announced that they would be acquired by the private equity firm Advantage Partners for JPY 627 per share, a 61% premium to the last traded price of the announcement day (26 January). Growell Holdings, a drug store chain, announced robust first quarter earnings (sales +9.4% year-on-year; operating profits +20.4%). Visibility has increased in the name since the company announced their move from the Second Section to the First Section of the Tokyo Stock Exchange on 27 April. Growell achieved strong half-year earnings for its fiscal year ending August 2012 (sales +9.7% year-on-year; operating profits +18.3% year-on-year). Shibusawa Warehouse, a company engaged in warehouse and transportation services, is seen as a beneficiary of a weaker Yen. There was no news in the quarter to propel the stock other than currency weakness since third quarter results announced on 7 February were less than stellar (sales +0.2% year-on-year; operating profits -2.6% year-on-year). In recent news, Shibusawa announced a downward revision to full year March 2012 forecasts, because net income was revised down by -36.7% due to stock valuation losses.

There was minimal impact from negative performers in the Fund. Shaklee Global (8205), a company that sells nutritional and personal care products, announced sales growth of +4.4% year-on-year and operating profit growth of +1.3% for the third quarter of fiscal year March 2012.

The cash position of the Fund at the end of March was 23.7%, compared to 3.8% at the end of February. The increase was primarily due to funds received from the tendering of Yasuragi shares. Current cash levels are now closer to 24%, as the Fund has taken profits in names that have out-performed the market.

The Bank of Japan announced its intention to achieve an annual inflation target of 1%, a significant change in sentiment since there was no previous inflation target. Due to past history of large promises with little follow-up, market pundits were unsure if the Bank of Japan was just paying lip service or would actually make due on the target. The news of the inflation target triggered a sell-off of Japanese Yen. Japan's central bank steadily increased the level of quantitative easing since first establishing an asset purchase program on 28 October 2010 in which JPY 5 trillion was earmarked for asset purchases and another JPY 30 trillion for loans. Since commencement of the asset purchase program, there have been five upward amendments to the program, the latest occurring on 27 April 2012, increasing the limit of asset purchases to JPY 40 trillion and bank loans to JPY 30 trillion.

J-REIT Highlights

The main driver for J-REIT unit prices was the surprise 14 February announcement by the Bank of Japan of its 1% inflation "goal" and an additional JPY 10 trillion in government debt purchases. Easing has since been expanded by an additional JPY 5 trillion on 27 April, accompanied with a JPY 10 billion increase in the J-REIT purchase allotment to JPY 120 billion.

The TSEREIT index gained +18.6% during the quarter, slightly underperforming the Nikkei 225's +19.3% gain. On a total return basis the two indices both enjoyed +20.3% performance.

A Financial Services Agency working group to review the legal structure for investment trusts and investment corporations held its first meeting on 7 March. An interim discussion paper is expected around mid-year, with a final report issued before the end of 2012, and submission of related legislation during the regular Diet session in 2013. Topics under consideration include changes to the sponsorship structure, capital strategy options (including unit buybacks) and insider trading rules.

There were reports that Japan's Teachers' Mutual Aid Cooperative Society, ($8.4 billion under management) plans to start investing in J-REITs and hedge funds in addition to the current equities and bonds as a part of diversification efforts. It may allocate as much as JPY 60 billion ($719 million) as soon as September.

During the quarter, the Bank of Japan purchased JPY 6.7 billion in J-REIT units. Thus far into Q2, BoJ has purchased an additional JPY 3.4 billion, to reach 63.8% of its total JPY 120 billion allotment. The sunset date for J-REIT purchases has been extended to June 2013.

During the quarter, four J-REITs (Nippon Building Fund (8951), Advance Residence Investment (3269), Japan Real Estate Investment (8952), Industrial & Infrastructure Fund (3249)) executed new equity issuances, totalling JPY 96.3 billion. J-REITs saw a milestone during the quarter, with Kenedix Inc (4321) announcing the listing of Kenedix Residential Investment (3278), the first new J-REIT IPO since 2007. The new J-REIT successfully listed on 26 April, raising JPY 14.8 billion. In total, J-REITs announced JPY 238.2 billion in acquisitions, along with JPY 48.3 billion in dispositions during the quarter.

Principal Risks and Uncertainties

Although the Bank of Japan's monetary easing briefly impacted the Japanese currency's appreciation, it is difficult to say whether or not Japan's central bank has done enough to switch the long-term direction of the Japanese Yen. The equity market shows a strong correlation to the foreign exchange rate between the Japanese Yen and the US dollar, and continued Yen strength points to weaker equity markets. Having said that, the Fund is well positioned to take advantage of market opportunities with a roughly 24% cash position.

All 54 of Japan's nuclear reactors are now shut down for 'routine maintenance', causing some concern as summer approaches. Nuclear reactors previously supplied roughly 30% of Japan's power. Businesses and households are expecting higher electricity bills, which could reduce profitability at manufacturers as well as curb consumer discretionary spending.

Top 10 Portfolio Holdings

 
                                         April   March 
                                          (%)     (%) 
 
 1921   TOMOE CORP                        10.2    10.4 
 2533   OENON HOLDINGS INC                 9.2    10.4 
 3141   GROWELL HOLDINGS CO LTD            8.8     9.1 
 9304   SHIBUSAWA WAREHOUSE CO LTD/THE     8.4     8.9 
 2178   TRI-STAGE INC                      8.2     8.4 
 8205   SHAKLEE GLOBAL GROUP INC           7.2     5.1 
        INVINCIBLE INVESTMENT CORP 
 8963    (REIT)                            5.5     5.1 
        ICHIGO REAL ESTATE INV CORP 
 8975    (REIT)                            5.1     4.2 
 3001   KATAKURA INDUSTRIES CO LTD         4.2     4.1 
 3528   GRO-BELS CO LTD                    3.7     3.5

Sector Weightings*

 
                               April   March 
                                (%)     (%) 
 Advertising                     8.2     8.4 
 Apparel                         4.2     4.1 
 Beverages                       9.2    10.4 
 Engineering & Construction     10.2    10.4 
 Internet                        1.0     0.9 
 Investment Companies            3.7     3.5 
 Machinery-Diversified           1.0     3.4 
 Real Estate                     0.9     0.6 
 REITs                           9.4     9.8 
 Retail                         14.7      16 
 Storage/Warehousing             8.4     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 10 May 2012 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