Sifting through Curtis Freeze likens himself to a modern day prospector.
Small caps
Hawaii Kai's Prospect Japan
Fund puts legwork into
picking its stocksManaging from the office by the bay
By Rick Daysog
rdaysog@starbulletin.comThe 39-year-old president of locally based Prospect Asset Management Inc. has spent much of the past decade scouring Japan's topsy-turvy stock market for hidden investment gems.
Freeze's company is the investment adviser for the Prospect Japan Fund, a $100 million closed-end fund specializing in undervalued, small-cap stocks in Japan. He is also the portfolio manager for the Japan Smaller Companies Fund, an open-end, small cap mutual fund that Prospect launched last week.
Unlike many of the big funds which focus on blue-chips companies like Sony and Mitsubishi, Freeze is one of a handful of American portfolio managers who focuses on the lesser known stock issues in Japan's small cap market.
Many of his favorite stocks are thinly traded and are based in far-away places like Kyushu and Osaka. Few would be recognized by even the most savvy U.S. investor.
One company was so far off the beaten path that a Prospect analyst had to travel hours by train and ride a taxi up a gravel road before arriving at an old corrugated steel warehouse, which served as the company's offices. That company's stock enjoyed a 900 percent run up two years ago.
"We're looking for things that are undercovered where we can add value," said Freeze. "We're trying to find gold in this second tier."
That approach has panned out for many of Freeze's clients, which include Texas billionaire H. Ross Perot, who hired Prospect in 1998 to manage his $20 million Japanese stock portfolio.
Prospect Asset Management Inc.
President: Curtis Freeze
Founded: 1994
Headquarters: Honolulu
Employees: 12
Assets under management: About $120 million
Funds: Prospect Japan Fund, Japan Smaller Companies Fund
Web address: http://www.prospectjapan.comTop holdings in the Prospect Japan Fund
Company Pre-tax profit 3/00-3/01 Joyfull -10.6% Touei Housing 22.3% Joint 92.3% Nitori 7.9% Belluna 21.5% Arc Land 14.0% Nishimatsuya Chain 18.7% Fuso Lexel 54.8% K’s Denki 17.4% Source: Prospect Japan Fund
On an annualized basis, the Prospect Japan Fund has seen its net asset value increase 33.8 percent during the past three years, outpacing many of the higher profile funds that invest in Japanese stocks, according to a recent study by J.P. Morgan.
Small- and mid-cap funds managed by Fidelity Investments and Nomura Asset Management generated total returns of 23.1 percent and 18.6 percent, respectively, according to the J.P. Morgan study.
And while Prospect's Japan fund is down 14.2 percent for the 12 months ended June 15, the Nomura and Fidelity small-cap funds as well as Japan's over-the-counter index are all down more than 40 percent.
In the tranquil setting of his Hawaii Kai office, Freeze hardly fits the profile of a hardened money manager.
But Freeze, a Utah native who received an M.B.A from the University of Hawaii in 1987, is known for his ability to sniff out undervalued stocks.
While some money managers base their investment decisions on reams of technical information they punch up on their computers, Freeze takes a more hands-on approach.
Each year, Freeze and his team of financial analysts make house calls to more than 300 companies.
Some of that information gathered -- including monthly sales figures and inventories, corporate expenses, supplier data -- could technically be considered insider information since it's not publicly disseminated.
Unlike U.S. corporations, which are required to disclose such data to all investors at the same time, Japanese corporations aren't bound by fair disclosure laws.
"What we do is approach a company directly, they give us very good information and we invest based on that information, Freeze said. "In Japan that's legal. In the U.S. it's illegal, you go to jail.
Freeze said he once sent out one of his analysts to Yamaguchi City in an isolated part of southern Japan to meet with officials with a company known as Fast Retailing, which made a popular line of inexpensive leisure wear.
After riding a train for several hours, the analyst took a cab ride which took him up an old mountain road and stopped in the middle of the woods next to a corrugate steel warehouse.
Pitching a new fund
While Prospect Asset Management Inc. has called Hawaii its home for the past seven years, it's hardly a household name here.But the company is trying to increase its local profile as it aggressively attempts to market its new mutual fund.
Prospect, which also is in the process of setting up a real estate investment trust to acquire residential properties in Japan, has met with a number of local brokers and well-heeled investors to pitch its Japan Smaller Companies Fund.
Company President Curtis Freeze and his sales staff also plan to hold meetings with investors in New York to promote the new fund.
According to Freeze, the Japan Smaller Companies Fund aims to mirror the performance of the older, more established closed-end Prospect Japan Fund by investing in similar companies.
The difference is that the new fund will largely be marketed to individual investors, whereas the closed-end fund is available only to some of the bigger institutional investors.
The warehouse was Fast Retailing's headquarters. Soon Prospect invested in the company, and Fast Retailing's stock skyrocketed more than 900 percent after the company's line of clothing became fashionable.
"He was convinced he was going to get mugged," said Freeze. "But it turned out to be our best holding for the year."
Up in a down market
Japan has hardly been a gold mine for U.S. investors. The nation's decade-long economic slump, coupled with recent political uncertainties, has wrecked havoc on the Japanese stock markets.
During the past five years, the Nikkei Index has fallen by more than 42 percent.
Freeze concedes that it's difficult predict when Japan's economy will rebound but he believes that his portfolio is well-positioned for such a comeback.
For him, it's simply a matter of picking the best-managed companies in the worst sectors.
One company that fits that profile is Joint Corp., a Tokyo-based developer of condominium and single-family homes.
Prospect has been a major shareholder in Joint Corp. for several years. Although the company's earnings have been solid, it was largely ignored by mainstream investors due to the depressed Japanese real estate market.
But a new law that allows developers to set up real estate investment trusts, coupled with signs of recovery in the Tokyo-area real estate market, has led to a doubling of Joint's stock price since January.
"When you look through the rubble, you look for the best managed company you can find and you find it before other investors start looking," Freeze said.
The scenic views of Koko Head and Maunalua Bay serve as an unlikely backdrop for international finance. Managing from the
office by the bayHawaii Kai firm invests millions
in small Japanese companiesBy Rick Daysog
rdaysog@starbulletin.comBut the unassuming, first-story office in Hawaii Kai is home to an investment advisory firm with more than $120 million in under management and A-list clients that include H. Ross Perot.
Since 1994, Prospect Asset Management Inc. has quietly operated its $100 million in assets Prospect Japan Fund out of this and other Hawaii locations, taking advantage of overlapping time zones with the Japanese stock market.
"Hawaii is a natural halfway house for people who spend a lot of time in Japan and Hawaii,' said Curtis Freeze, Prospect's founder and president. "The beauty of working in Honolulu is that we can stay in touch with the companies in Japan and we can stay in touch with our analysts in Tokyo."
To be sure, there have been several Hawaii-based efforts to bridge the trading gap between Japan and the U.S. But many of the large-scale efforts -- such as the unsuccessful early 1990s effort by the American Stock Exchange to open a 24-hour trading operation downtown -- have largely fizzled.
Freeze sees that changing.
With recent technological advances that allow investors to receive the latest market information electronically, Freeze envisions the possibility of a small cottage industry of portfolio managers, analysts and investment advisors setting up shop in Hawaii.Typically, such investors will hold a stock for up to three years and the daily movements of a stock are of less concern, he said.
"There are a lot of people who would like to be here," said Freeze, who received an MBA from the University of Hawaii in 1987. "There are a lot of people who were raised in Hawaii but are living and working in Tokyo and would love to come back."