Shuhei Abe, president of Sparx Asset Management, has outdone the competition in the severest of environments over the past decade. And as market conditions improve, he argues, his funds will producesparkling performance that will further outpace rivals.
We are entering into a good cycle now, and our results are better than anyone’s, he said.
Abe, whose company is one of the rare independent asset managers in Japan and the first one to be listed on the Jasdaq stock exchange has reason to be confident. His long-short Japanese equity fund has returned 21 percent over the past six years, while the Tokyo market overall has lost 25 percent. During the past three years, when the Topix, the broadest index of Japanese equities, lost 28 percent, Sparx’s Japanese equity fund managed to limit its decline to 6 percent. Assets under management now total 470 billion, or $4.35 billion, up from 50 billion just four years ago.
The gains can be attributed partly to assiduous research. Sparx specializes in digging out nimble companies that occupy promising niches, so Abe and his team of analysts conduct intensive, bottom- up analysis of small and mid-cap companies.
The firm’s small-cap fund counts among its holdings Askul Corp., which delivers office supplies to companies, and NBC Inc., a maker of high-tech chemical fibers. Askul shares are up 45 percent so far this year, while NBC shares are up 98 percent. Also, the stock market in Japan has risen 35 percent since this spring, pushing Sparx’s funds up along with most vehicles that invest in Japanese equities.
But more important, Abe and his lieutenants contend, Japan’s economic and social structure is finally catching up with capitalist principles, to the benefit of companies and shareholders.
Banks’ cross-shareholding with corporations is unwinding, Abe said. The government had held influence over the banks, and banks controlled companies through share ownership. That governance structure is falling apart.
By selling off their stock portfolios in recent years, Japanese banks and companies have whittled their cross-holdings back to about 25 percent of listed shares from about 50 percent a decade ago. In place of these ossified arrangements have come active traders, like investment trusts and foreigners. There is growing awareness in the market now that you have to abide by market rules, Abe said.
One Sparx fund to profit from that newfound market discipline is the recently launched corporate governance fund, which buys shares in companies that commit to making governance improvements. The fund’s $200 million in assets under management come from Calpers, or the California Public Employees’ Retirement System. We are hoping to get companies to raise awareness of the market, said Kenzo Kosuda, a Sparx director the same kind of activist approach taken by Calpers.
Analysts said that Sparx’s access to foreign investors gave the firm unique strength. Sparx has more fans abroad than at home, said Ishijima Toshihiro, an analyst at UFJ Tsubasa Securities who follows Sparx. One reason for that high profile, Toshihiro said, is that Sparx sells performance and track records rather than connections and group relations. Foreign investors prefer unbiased fund management, Toshihiro said.
For all this, Sparx charges hefty fees: from 10 percent to 25 percent of returns in excess of baseline levels, which are set at the peak performance of the previous 12-month period. The fees vary from fund to fund but most hover around 20 percent.
For the six months through September, Sparx collected 1.3 billion in performance-based fees, up from 281 million in the same period last year. Those fees contributed measurably to the 1.6 billion pretax earnings posted for that half-year.
Abe, who started out as an analyst and bond salesman at Nomura Securities in the late 1970’s, has a master’s degree in business administration from Babson College in Massachusetts. He honed his money management skills while working with George Soros in the mid- 1980’s, managing the hedge-fund master’s Japanese holdings.
As one of the few asset managers unaffiliated with a financial grouping, or keiretsu, such as Nomura, Daiwa or Mizuho, Sparx has struggled to clinch deals from domestic pension funds and major asset allocators. Now domestic clients are on the rise. In 2000, only 27 percent of Sparx’s assets under management came from clients based in Japan, but that ratio rose to 46.4 percent by the end of September.
Abe credits word of mouth. Pension assignments are increasing because consultants are recommending us, he said.
