SPARX might fly
Company founder envisages covering entire region with intelligent investment team
By David Macfarlane
The origins of SPARX Group Co Ltd date back to 1989 when company founder Shuhei Abe set up one of Japan’s first independent asset management boutiques specialising in Japanese equities, SPARX Asset Management Co Ltd. Since then, the firm has grown exponentially as it evolved into a diversified asset management company that now covers the whole breadth and width of Asia-Pacific markets. Asia Asset Management spoke to Mr. Abe to find out how he did it.
AAM: Can you tell us what motivated you to launch SPARX back in 1989 when you could have continued a comfortable life as a company employee?
I started my career as an equity analyst at Nomura Research Institute (Japan) and transferred to Nomura Securities, one of Japan’s top brokerage firms. Nomura sent me to New York, where I was really inspired by US capitalism. During this time I was trained by US investors and began to realise that there was a huge gap between the US and Japan when it came to investments. By applying the American way of thinking, or investment dogma, I realised I could open up a lot of opportunities for investors such as myself.
So I put together a shelf report on Japan - at that time Japan was in the heydays of a real estate and stock bubbles boom - the assets held by the companies; the value of the assets held by companies had just started flowing and the stock price was not catching up. In my report I wrote it was worth looking into those companies carrying a lot of property assets, and if they carried a large discount; then buy them! I sent some of the report to well-known investors on Wall Street and eventually met George Soros in 1985. After meeting him; I worked for him for about two years and learnt the ropes.
It didn’t take long before I realised that by working for just one individual, albeit a very wealthy one, it was impossible to fathom out where my career was heading. I spent seven years in America in all before being sacked in early 1988.
In many ways I had dived into the ocean because it looked very beautiful. But I soon realised that the ocean is much deeper and more dangerous than it looks - but it was already too late - I had to continue.
I decided to come back home to Japan. I had to think what to do next, so I thought about it and came to the conclusion that the only thing I could do was to invest in Japan. So in 1989, I decided to start SPARX with six other people. We were all pretty junior and I started the company with zero assets - so we had to look for investors. So, the theme that I put together there when I started SPARX was to invest in very small companies. No one else was doing any research into very small companies at that time, but I had already. So I began visiting very big investors around the world and told them that I would work for them on the ground in Japan looking for good investments. Luckily, very early on I was introduced to a sovereign wealth fund in the Middle East. It was sheer luck really; I was introduced to them by one of my friends. Subsequently I visited them and explained the case two or three times. Following the third meeting, I received a fax saying they would wire US$100 million to SPARX on my return to the office. This was in 1989. So that was how I started the business.
In the market, SPARX Asset is perhaps best known for its focus on mid and small caps equities. Why did you lead your company into a focus on managing portfolios of mid and small caps?
Japan was at the peak of the bubble when I started the company and I had been well trained by American investors. It got very hard to justify testing the means of companies with a PE (price/earnings) multiple of 50, 60, 70x. When I looked at very small companies - small and illiquid companies - their PE was in the lower range of tens. So there was a huge gap between liquid companies and illiquid companies and these illiquid companies happened to be very small. Also, Japan being continually default of global capital which had created the bubble in the first place, could not continue for long. I said that smaller companies were cheap and that they would survive the bubble bursting. Luckily, for the first 12 months, my theory worked. Smaller companies did very well, even after the Nikkei started to decline. Small companies peaked in July of 1990 whereas the Nikkei’s peak was in December of 1989. So this window of opportunity really helped us to start the company.
The success of SPARX has been very impressive given its relatively brief history; can you describe some of the major acquisitions that have enabled you to grow as a group?
In the year 2001 the company became public. I began looking at the opportunity to list the company because I wanted to build an institution that would last for a long time. That was my ambition - I wanted a legacy to live on beyond me.
I decided to make the company public and we were the first and only to do so; after ten years, no other companies have become public on the Japan OTC Market (JASDAQ).
When I announced the IPO, SPARX had assets of US$2.7 billion, which were all in Japan - this was in December 2001. From 2001 to 2006, that US$2.7 billion grew to US$16 billion. The Japanese market hit the bottom in 2003 and started rising. The company prospered and grew very quickly and while it was growing it crossed my mind that if we only do Japan then there is a limit. So I really thought about what I should do next and decided to do investment in Asia.
In 2005 I was invited to look at a small asset management company called Cosmo in Korea. At that time the company had about US$400 million AUM and they were not making money. So I decided to acquire that company. And I then started to think that I might as well investigate opportunities in other parts of Asia. My attention was then drawn to PMA, which hadn’t been going long but they had a very clear concept of doing an institutional alternative investment portfolio. We acquired that too. In my mind, we had Japan, we had Korea and we had the rest of Asia. My idea was to be a centre for Asian investment.
Before we acquired those two companies our Japan AUM was between US$15 and 16 billion; after the acquisitions, AUM grew to US$20 billion - this was in 2007. Markets peaked and then the global financial crisis kicked in beginning with Lehman’s. Currently our AUM figure is around US$7 billion. Now my priority is to restore the business.
I still represent more than 50% of the company. I did not liquidate or sell my position much. Eventually, the company should be owned by the public in the long-term so that it will be run by the best professionals and continue.
What does the future hold for Japan?
I think we really need now to look at Japan as a part of Asia. I am now really shifting the wheel towards Asia. Although it was very difficult for a while to have these groove companies to manage; after five or six years, it’s proved to be a very shrewd investment.
We have between 50 and 70 people who are only doing Asian investments. As an investment company, SPARX is now a big company. If you look at companies doing only Asia, we are quite significant.
How do you look at the Asia-Pacific region as a whole?
Japan and Japanese companies continue investing in Asian countries to build their factories and the products, up to now, were all basically imported back to Japan for exporting to the US. Looking ahead to the next five or ten years, these products will be consumed more and more in Asian markets.
Structurally, Asia cannot produce more than it consumes. Japan is on the opposite side in that Japan cannot consume more than it produces. This gap really creates a huge opportunity for both sides. But the financial markets are not following that. Financial markets are still looked at as Asia excluding Japan. I would like to create an intelligent team that can look to grow the funds to cover the entire Asia-Pacific region.