Michael Shimoko Director, SPARX Asset Management Co., Ltd.

Michael ShimokoMichael ShimokoDirector, SPARX Asset Management Co., Ltd.Director, SPARX Asset Management Co., Ltd.

([email protected])([email protected])

January 29, 2002January 29, 2002

Excellence in Asset ManagementExcellence in Asset Management

- SPARX Japan Long Short Fund -- SPARX Japan Long Short Fund -

2© 2002 SPARX Asset Management Co., Ltd.

SPARX is a unique independent investment management company SPARX is a unique independent investment management company based in Japanbased in Japan

SPARX Asset Management

AUM (12/28/01) : Approximately $2.2 billion or 290 billion yen

Licenses: Discretionary investment managementSecurities investment trust management

Capitalization: Publicly-traded as of Dec. 4, 2001 (Jasdaq market)

Employees: 70 employees(majority of which have an equity interest in the firm)

Japanese Equity Specialist• Intensive bottom-up research since

1989• 2000+ company visits annually• Unique network amongst Japanese

companies’ top management• 14 research analysts (master degrees

at foreign universities as well as overseas investment experience)

Global Client Base• Europe, North America, Japan, and

Asia- Financial institutions- Pension funds- Corporations- Foundations- Family offices / high net worth clients


Overview of SPARX Long Short Fund

The SPARX Long Short Fund’s objective is to generate absolute The SPARX Long Short Fund’s objective is to generate absolute returns based on “locally-based” fundamental researchreturns based on “locally-based” fundamental research

Investment Objective:To preserve capital and to provide absolute returns for investors

Investment Approach:– Capitalize on intensive “in-house” research expertise and extensive

information network for stock selection– Long portfolio includes all publicly-traded equity securities– May opportunistically use convertible bonds and warrants on the long-side– Takes independent long- vs. short-approach, but may occasionally use pair-

trading approach– Short portfolio generally consists of large-cap names– Normal portfolio carries a net long bias, but may shift according to market

conditions– Total gross exposure (long + short portfolio) is usually 100% or less of NAV to

avoid excessive risk


Since inception, the Long Short Fund has yielded an average annual Since inception, the Long Short Fund has yielded an average annual return of 19.84% with less than one-half of the volatility of the marketreturn of 19.84% with less than one-half of the volatility of the market

(Inception=100)

40

60

80

100

120

140

160

180

200

220

240

6/22/97 10/31/97 3/31/98 8/31/98 1/29/99 6/30/99 11/30/99 4/28/00 9/29/00 2/28/01 7/31/01 12/28/01

SPARX Long Short Fund

NK 225 (USD)

7.76% -33.27%2001 Calendar Year Return

Key Statistics Long Short Fund NK 225 (USD)

19.84% -10.12%Average Annual Return115.62% -54.73%Inception to 12/28/01

1.39% -0.62%Sharpe Ratio (annualized)11.55% 25.24%Standard Deviation (annualized)


Gross – Net Exposure

The Fund is a long-biased product and typically does not employ The Fund is a long-biased product and typically does not employ leverageleverage

0%

20%

40%

60%

80%

100%

120%

140%

160%

97/6 97/9 97/12 98/3 98/6 98/9 98/12 99/3 99/6 99/9 99/12 00/3 00/6 00/9 00/12 01/3 01/6 01/9 01/12

GROSS NET

Long / Short Ratio

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

97/6 97/9 97/12 98/3 98/6 98/9 98/12 99/3 99/6 99/9 99/12 00/3 00/6 00/9 00/12 01/3 01/6 01/9 01/12

LONG SHORT


The 3-Year Cycle

Cyclical positives – business cycle, sentiment, equity prices, liquidity Cyclical positives – business cycle, sentiment, equity prices, liquidity -- are making Japanese stocks look very attractive-- are making Japanese stocks look very attractive

Source: Bank of Japan1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

*Average Outstanding

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%Money Supply

(M2 + CD)*

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20028,00010,00012,00014,00016,00018,00020,00022,00024,000

+51％

-33％

+56％ -

43％

+62％

-54％

NIKKEI 225 – Price Index

June 9421,552.81

July 9514,485.41

June 9622,666.8

Oct 9812,879.97

April 0020,833.21

Sept 019,504.41

Source: Datastream

Aug 9214,309.41


Appendix – SPARX 2002 Outlook for JapanAppendix – SPARX 2002 Outlook for Japan


“Mega-Bank” Stock Price Performance

The market’s expectation of future prescriptive action rather than The market’s expectation of future prescriptive action rather than solvency risk accounts for the fall of the Japanese bank stockssolvency risk accounts for the fall of the Japanese bank stocks

0

20

40

60

80

100

120

9/11/01 10/11/01 11/11/01 12/11/01 1/11/02

MizuhoMTFGUFJMitsui-Sumitomo

(Price as of September 11, 2001 = 100)

Source : Bloomberg

Such action will dilute existing shareholders Such action will dilute existing shareholders and lower book values of affected and lower book values of affected

institutions, thus at-risk banks have seen a institutions, thus at-risk banks have seen a significant decline in their stock pricessignificant decline in their stock prices


Japanese Risk Premium

Concern overConcern overLTCB’s failureLTCB’s failure

YamaichiYamaichiCollapseCollapse

Daiwa BankDaiwa BankScandalScandal

A low risk premium reveals that the market is not concerned about A low risk premium reveals that the market is not concerned about systematic risk (solvency risk)systematic risk (solvency risk)

Source : BBA

-10

0

10

20

30

40

50

60

70

80

90

100

95/1/

495

/7/4

96/1/

496

/7/4

97/1/

497

/7/4

98/1/

498

/7/4

99/1/

499

/7/4

00/1/

400

/7/4

01/1/

401

/7/4

02/1/

4

(basis points)

3-Month

6-Month

(Yen LIBOR Base)

The structural negatives have obscured the largely cyclical, positives…The structural negatives have obscured the largely cyclical, positives…

Unlike the 1998 crisis, a safety Unlike the 1998 crisis, a safety net has been built into the net has been built into the Japanese financial systemJapanese financial system


Production and Inventory Cycle

……the domestic production cycle appears to have reached its bottomthe domestic production cycle appears to have reached its bottom

Source: METI.

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 1/2002

Production

Inventory

Inventory/Shipment Ratio

(year-over-year % chg; 3-month moving average)

Production Plan


Bank of Japan’s Quarterly Tankan Survey – Business Sentiment

Japanese business sentiment’s negative rate of change has slowed Japanese business sentiment’s negative rate of change has slowed

Source: BOJ

-80

-60-40

-20

0

2040

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Electric Machinery (Large)

Electric Machinery (Mid)

Electric Machinery(Small)


Japanese Yen to US$ (GTIS) – Exchange Rate

The weakening yen will contribute to higher profit margins for The weakening yen will contribute to higher profit margins for manufacturing companiesmanufacturing companies

Source: DatastreamFrom 7/1/92 to 8/1/02 weekly

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200270

80

90

100

110

120

130

140

150


Bank Cross-Share Holdings

Meanwhile the unwinding of cross-share holdings is creating an Meanwhile the unwinding of cross-share holdings is creating an overhang in the equity marketsoverhang in the equity markets

Source: GS Equity Derivatives Research, DatastreamNote: Crossholding ratio = 1 - (GSCA Japan market cap/FT/S&P Japan market cap); annual (Jan.) measurements.

35%

40%

45%

50%

55%

1992 1993 1994 1995 1996 1997 1998 1999 20008,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

2001

Crossholding Ratio (%)

Nikkei 225

37.5%37.5%

51.3%

Going forward, anticipate Going forward, anticipate 4 trillion yen worth of 4 trillion yen worth of stock sold every yearstock sold every year


Japanese Public Institutions: Asset Allocation

This selling pressure is offset by growing demand from Japanese This selling pressure is offset by growing demand from Japanese public institutions who must re-balance their investment portfoliospublic institutions who must re-balance their investment portfolios

Japanese EquityWeight :

1.3 5.0% 5.7 6.0% 4.4 12.0%

Amount (JPY trillion): 3.2 12.5 7.0 7.4 6.5 17.6

Source : Goldman Sachs

Trust Fund Bureau Account Domestic Bonds Domestic Stocks Foreign BondsForeign Stocks Others

Postal Savings Public PensionKampo

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ass

et A

lloca

tion

Actual Model Portfolio



Nearly 20 trillion yen must be Nearly 20 trillion yen must be invested in Japanese equitiesinvested in Japanese equities


Price/Earnings Distribution – TSE 1 vs. OTC

In this environment valuations have fallen to extremely attractive In this environment valuations have fallen to extremely attractive levelslevels

0 5 10 15 20 25 30 35 40 45 50 55 60 Over

Source: SPARX

0 5 10 15 20 25 30 35 40 45 50 55 60.0x Over

TSE1 OTCTSE1 OTCTSE1 OTC

0%

5%

10%

15%

20%

25%

0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x 35.0x 40.0x 45.0x 50.0x 55.0x Over

As of Dec. 28, 2001

62% of OTC companies are selling less than 15.0x62% of OTC companies are selling less than 15.0x

28% of TSE1 companies are selling less than 15.0x28% of TSE1 companies are selling less than 15.0x


Price/Book Value Distribution – TSE1 vs. OTC

Today’s Price / Book valuations show that a number of companies Today’s Price / Book valuations show that a number of companies are trading under book valueare trading under book value

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 6.0x Over

TSE1 OTCTSE1 OTCTSE1 OTC

80% of OTC companies are selling less than 1.0x80% of OTC companies are selling less than 1.0x

76% of TSE1 companies are selling less than 1.0x76% of TSE1 companies are selling less than 1.0x


The 3-Year Cycle

Though at a ten-year low, the Japanese stock market is looking very Though at a ten-year low, the Japanese stock market is looking very attractive from a cyclical point of viewattractive from a cyclical point of view

Source: Bank of Japan1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

*Average Outstanding

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%Money Supply

(M2 + CD)*

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20028,00010,00012,00014,00016,00018,00020,00022,00024,000

+51％

-33％

+56％ -

43％

+62％

-54％

NIKKEI 225 – Price Index

June 9421,552.81

July 9514,485.41

June 9622,666.8

Oct 9812,879.97

April 0020,833.21

Sept 019,504.41

Source: Datastream

Aug 9214,309.41

SPARX Asset Management Co., Ltd.SPARX Asset Management Co., Ltd.Gate City Ohsaki East Tower 16FGate City Ohsaki East Tower 16F1-11-2 Ohsaki, Shinagawa-ku, Tokyo 141-0032, Japan1-11-2 Ohsaki, Shinagawa-ku, Tokyo 141-0032, Japan(Tel) 81-3-5435-8200 (Tel) 81-3-5435-8200 (Fax) 81-3-5435-8201(Fax) 81-3-5435-8201

U.S. OfficeU.S. OfficeSPARX Investment and ResearchSPARX Investment and ResearchWaikiki Trade CenterWaikiki Trade Center2255 Kuhio Avenue, Suite 16202255 Kuhio Avenue, Suite 1620Honolulu, Hawaii 96815-2626Honolulu, Hawaii 96815-2626(Tel) 1-808-931-2000 (Tel) 1-808-931-2000 (U.S. Toll Free) 1-800-334-1906 (U.S. Toll Free) 1-800-334-1906 (Fax) 1-808-931-2099(Fax) 1-808-931-2099Contact: Michael ShimokoContact: Michael Shimokoemail: [email protected] email: [email protected]

This report has been prepared by SPARX Asset Management Company, Limited for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of

any offer to buy. While all reasonable care has been taken care to ensure that the information contained herein is not untrue or misleading at the time of the publication, we make no representation as to its

accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions

without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report may not be

reproduced, distributed or published by any recipient for any purpose.

Michael Shimoko Director, SPARX Asset Management Co., Ltd.

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