Sparks of hope for financial industry

As well as the big sharks of the financial world, many smaller fish slip through the financial seas, quietly and unobtrusively doing their business, until they become big fish in their own right. One of these has been the SPARX Group, founded 20 years ago, based out of Japan, which had about JPY1.7 tln in assets under management in 2006. These assets are managed on behalf of a number of institutional investors, based on principles learned from George Soros by the SPARX founder, Shuhei Abe when Abe managed Soros’s Japanese investments.

Historically, SPARX has been somewhat of a maverick in the market. Having no keiretsu ties, it promoted the history and earnings of its investment decisions, rather than the group ties as generally promoted by Japanese asset managers, and hence attracted the attention of overseas clients, though many of its investments were on behalf of Japanese capital. In addition, it based its investments on companies with a relatively small market cap and, in another break from tradition, used its power as a shareholder to promote activist policies (such as the Pentax-Hoya merger). However, as the equity value of these assets has slipped, and the financial jaws start to bite, SPARX, one of the few publicly traded (Nikkei code 8739) Japanese asset management companies, has been forced to scale back many of its overseas operations, closing trading operations in many countries, and, in common with many other financial firms, being forced to scale back on bonuses to staff which, while generous by most Japanese standards, were always far from the lavish amounts handed out to workers in foreign houses. Reportedly this has led to some significant staff losses in the past months.

Adding insult to injury, the share price currently stands at just over JPY10,000, down from a 12-month high in the mid JPY50,000s at the end of February 2008, and a 5-year high where the price spiked at JPY237,000! These figures, of course, imply that deep significance may be attached to brokerage equity prices, a theory discounted by many.

Sources claim that the loss of some prime trading talent from the trading floor in 2007 is responsible for the apparent change in fortunes, which appear to have started about that time. In fact, the truth is probably more complex than that, and involves other factors.

As the dollar has fallen against the yen, it makes some sense for SPARX’s foreign institutional customers to retain their dollars, and to cash in their yen-based holdings. Furthermore, the strategy of investing in small market cap companies means it is more difficult to pour quarts into pint pots, and to adopt a graceful exit strategy when hard times come round, leaving SPARX with relatively inflexible portfolios.

But on the plus side, the SPARX funds have performed better than the average over the past few months. Though, like all other funds, it shows a year-on-year decline, the SPARX Japan Smaller Companies fund, which exhibits all the seemingly unwelcome characteristics mentioned above, has actually increased significantly in value since October 2008. Even an aggressive portfolio such as the SPARX Rising Sun fund is showing signs of life, and is some way off from its low point of Black October. The same is true, to a lesser extent, for the Asian funds managed by SPARX.

Proof, if any were needed, that SPARX’s judgment is still essentially sound. Derivatives and exotic instruments never formed a major part of SPARX’s corporate culture, and the exposure to these was minimal. In a broader sense, these funds show that the Japanese economy, while reeling, is far from out for the count. The same may well be said of SPARX itself - though there have been undoubted setbacks in the past year or so, Abe’s vision of a profitable Japanese fund management company looks as though it will survive, and, given a slightly more favorable market environment, may even flourish again.

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