By MARCEL PORCHERON 27/10/2008
We originally rated Ken Nishizawa’s high risk Japan funds on the back of his excellent long term track record of making strong excess returns and the high quality of his investment team at Funnex in Tokyo. Even after poor recent performance Nishizawa-san has an MRI of 98% and a career information ratio in excess of 2, suggesting that the likelihood that he is adding value is high. Difficult market conditions have had a negative impact on returns for the Melchior Japan portfolios as for other small and mid cap managers in Japan.
However, in the first half of 2008 Nishizawa’s performance began to diverge significantly from peer group: on average the Melchior Japan fund was 3.5% behind the Topix Small Cap index per month during the latest calendar year. We monitored the situation closely as Nishizawa continued to retain very high conviction in real estate stocks as the market sold these down aggressively. The portfolio’s holding in Urban Corporation alone eventually cost more than 8% and Nishizawa finally sold his large stake in the company just before it went into bankruptcy. Since then the portfolio has been repositioned and Ken Nishizawa appears to have taken a step back from day to day management of the fund.
For a fundamentally driven portfolio the high level of turnover in a falling market over the last year has been a concern whilst Nishizawa’s decision making in adding to his real estate related stocks with such high conviction has turned out to be a huge misjudgment. In addition, Nishizawa’s step back from day to day management means that we can no longer rate these funds as Buys. However, with the Funnex team at the helm existing holders may be able to recoup some value as they have already borne the cost of repositioning the portfolio.
Downgraded to 2 stars.