[Fund-Analysis] Top 10 Stocks Held by Japan's Most Successful Micro-Cap Value Fund
The largest value investing fund for small companies in Japan, and it holds some of the country's most promising companies!
One of the world’s richest and greatest investors, Mohnish Pabrai, once said:
“We love original ideas. But truly, there are already plenty of good ones out there, ours for the taking. If I were too proud to copy the ideas of others, I likely wouldn't have even a fraction of my current success.”
With those words of wisdom as an inspiration, it seems foolish not to piggy-back for free on the greatest investment-minds in Japan!
The beauty of this strategy is that all mutual funds in Japan have to disclose their stocks and their composition, so you are free to buy any stock the fund-managers have already researched and hand-picked without paying them any commission!
A while back, I made a post about Japan’s biggest value-stock investing fund:
Please read that article to find some truly interesting blue-chip value-investments.
However, if you want the opportunity to get a higher return your investment (with higher risk, of course), the small and medium-sized businesses (SMBs) is where you should look.
And for the ultimate risk/reward strategy, small- and micro- sized businessess is where you should focus.
Now it just so happens that there is an amazing fund specializing in value-oriented small- and micro sized companies:
SPARX Premium Japan Micro Equity Fund (nickname: Value Discovery)
This is perhaps the most interesting fund I’ve written about.
It has managed to return 130% since its inception in October 2015, compared to Nikkei average that has returned 58%:
This is a true testament that these fund managers have outperformed the Nikkei index even during downturns.
Fund Philosophy
“Among the stocks listed on the Japan financial instruments exchanges, we invest mainly in stocks that belong to the bottom 2% or less in terms of market capitalization, aiming to earn gains on price appreciation. The baseline for this fund is that Microcap have a large number of hidden stocks, many of which are undervalued, which opens up many hidden investment opportunities.”
“Since its founding in 1989, SPARX has been researching mid- and small-cap stocks and has a wealth of experience and information. At SPARX, the value of a company depends largely on management, and we believe that bottom-up research through interviews with management is effective.”
“When we believe companies have reached their full potential, we are not afraid to sell them and reinvest in more undervalued assets.”
Source: SPARX Asset Management
Top 10 stocks in SPARX Premium Japan Micro Equity Fund
Top 10 stock overview & performance
Today’s date in the graphs is the 25th of November 2022.
A green graph indicates a positive performance, and a red graph indicates a negative performance over a 5-year period.
1. Mitachi Industry (3321)
Mitachi Industry, together with its subsidiaries, operates as an electronics trading company in Japan and internationally. The company sells electronics devices, such as semiconductors, LCDs, etc., as well as electronics components and motors for car electronics, amusement equipment, industrial equipment, consumer equipment, communication equipment, and other industries.
It also manufactures and sells electronic devices and modules; and sells assembly equipment for SMT lines, inspection systems, etc.
The company was founded in 1972 and is headquartered in Nagoya, Japan.
2. PCI Holdings (3918)
PCI Holdings, Inc. engages in the information service business. It develops embedded control software for automobiles, heavy machinery, construction machinery, etc.; and equipment for telecommunications field, including mobile communication, as well as other information home appliances, various industrial equipment, semiconductor manufacturing equipment, etc.
The company also develops software, middleware, and application that control various devices; firmware for digital camera imaging control; and software for control semiconductor inspection equipment. In addition, it develops information software for finance, manufacturing, distribution, and other companies, and social infrastructure software for transportation and broadcasting, and IT systems.
PCI Holdings, Inc. was incorporated in 2005 and is headquartered in Tokyo, Japan.
3. Saxbar Holdings (9990)
Sac Bar Holdings Inc. engages in the retail sale of bags, fashion goods, and related accessories in Japan. The company is also involved in the design, manufacture, wholesale, and retail of luggage and bags, including travel, business, and casual bags for men, as well as the provision of repair services, and wallets and accessories for men.
The company operates specialty stores of bags and other fashion goods under the SAC'S BAR, GRAN SAC'S, kissora, efffy, and Beau Atout names, and accessory shops under the Tees Cees and Banana names.
It operates approximately 600 stores.
The company was formerly known as Tokyo Derica Co., Ltd. and changed its name to Sac's Bar Holdings Inc. in October 2014. Sac's Bar Holdings Inc. was founded in 1974 and is based in Tokyo, Japan.
4. Mainichi Comnet (8908)
Mainichi Comnet Co., Ltd. engages in the real estate business in Japan. The company is involved in the planning, design supervision, and development of real estate; property management of student condominiums and university dormitories; real estate brokerage and consulting business related to real estate use; and production of advertising materials for real estate tenant recruitment, as well as advertising agency business.
It also plans and arranges training camps and trips; plans and manages various sports competitions and international exchange programs; and offers job hunting support, employment seminars, and driving school placement services.
The company was incorporated in 1972 and is headquartered in Tokyo, Japan.
5. SE (3423)
SE Corporation engages in construction material and equipment business in Japan and internationally.
The company supplies ground anchors for the prevention of landslides, KIT reaction plates that harmonize with greening and scenery, anti-seismic ties for bridges to forestall the collapse of bridge girders in an earthquake, and other products. It also provides SEEE prestressing cables for prestressed concrete, outer cables, stay cables, and other products, as well as products and incidental engineering services for bridge and civil structures; and public-private partnership/concession services.
SE Corporation was founded in 1967 and is headquartered in Tokyo, Japan.
6. F-Tech (7212)
F-Tech Inc. designs, develops, manufactures, and sells automotive parts, related dies, machinery, and equipment in Japan, rest of Asia, and North America.
The company's products include various subframes; suspensions and beams comprising rear suspension beams, rear axle beams, trailing arms, and lower arms; control parts, including organ-type accelerator pedals, foot parking brakes, and adjustable pedals; and chassis systems. It also provides stamped parts, body frame parts, and fuel tanks for motorcycles; and aluminum die-castings and plastic components.
The company was formerly known as Fukuda Press Kogyo Inc. and changed its name to F-Tech Inc. in 1988. F-Tech Inc. was founded in 1947 and is headquartered in Kuki, Japan.
7. Shinwa (3447)
Shinwa Co., Ltd. provides scaffolding and logistic equipment in Japan. It offers wedge binding type scaffolding, next generation scaffolding, and other scaffolding equipment; hanging and mesh pallets; pallets for pipes, system scaffolding, and preceding handrails; and optional parts, such as pre-installed handrails.
The company was founded in 1977 and is headquartered in Kaizu, Japan.
8. Asia Pile Holdings (5288)
Asia Pile Holdings Corporation, through its subsidiaries, operates as a general foundation construction company in Asia.
The company engages in the manufacture, installation, and sale of precast concrete piles, steel pipe piles, and cast-in-place piles.
The company was formerly known as Japan Pile Corporation and changed its name to Asia Pile Holdings Corporation in October 2015. The company was founded in 1923 and is headquartered in Tokyo, Japan.
9. Ashimori Industry (3526)
Ashimori Industry Co., Ltd. manufactures and sells automotive safety systems in Japan and internationally.
The company offers automotive seat belts, air bags, steering wheels, tonneau covers, electric sunshades, manual shades, and separation nets. It also provides disaster prevention materials and equipment; fire hoses; fire hydrant hoses; and hoses for golf course, water sprinkling and irrigation, and marine and irrigation use. In addition, the company offers industrial materials, including ropes and cords; wide-woven textiles and silica screens; tapes and belts; safety harnesses, carrier cable ropes, and other fall-prevention equipment for use at construction sites; and trucking and logistics related products, such as air roll systems, light slider labor-saving loading/unloading equipment, NA tightener load-securing clamps for trucks, and cal-pane thermal barrier partition panels for trucks, as well as construction materials.
The company was formerly known as Ashimori Rope Works and changed its name to Ashimori Industry Co., Ltd. in 1944. Ashimori Industry Co., Ltd. was founded in 1878 and is headquartered in Osaka, Japan.
10. T.O.W. (4767)
TOW Co., Ltd. engages in the planning, production, construction, creation, and management of events and seminars primarily in Japan.
The company is also involved in the construction of buildings and erection of other structures, interior decoration, and electrical installation work on contracts for promotional and other events. In addition, it plans and produces advertising and public relations events, and sales promotion campaigns; plans, produces, and manages media and media content; plans, produces, acquires, administrates, and sells video and audio software; and plans and publishes exhibitions and interior decorations.
The company was founded in 1976 and is headquartered in Tokyo, Japan.
Conclusion: Thoughts on investing in Micro-cap
As I stated in the beginning of this article, investing in micro-cap stocks is associated with very high risk.
However, just as the SPARX Premium Japan Micro Equity fund has shown, if done right, your return on investment can be incredible!
If you look at the 5-year performance on the top 10 stocks in the fund, it is striking is how many of them are down in value even though the fund has performed remarkably well overall.
This is a clear indication that if you intend to invest in micro-cap stocks, you need to have a diversified portfolio. Many of your micro-cap stocks will go down substantially, or even go bankrupt, but just a few winning stocks are enough to cover up for every dud.
Also, investing in micro-cap requires a more actively managed portfolio. Just as the SPARX managers say, “When we believe companies have reached their full potential, we are not afraid to sell them and reinvest in more undervalued assets.”
Hence, the present stocks in the list are there because the fund management believe they are still undervalued, while more successful stocks have been sold and their proceedings being reinvested.
It is quite insane that 8 out of the fund’s top 10 holdings have a P/E ratio of <10, which showcases just how undervalued the micro-cap segment in Japan likely is.
To end on a lesson about risky investments, as the good saying goes “A stock can go up infinitely, but only down 100%”. Keep this in mind when investing in micro-cap as you will be faced with many horrible investments, but hopefully some truly great ones that make up for all losses. Also, never spend money you cannot afford to lose!