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The Honolulu Advertiser
Posted on: Sunday, August 5, 2001

Hawai'i Kai firm's Japan fund takes off

By Shayna Coleon
Advertiser Staff Writer

While many investors continue to worry about Japan's weak economy, Curtis Freeze is optimistic.

Prospect Asset Management president Curtis Freeze, center, poses with his staff, from left, Miho Hiwada, Earl Crawford, Hamilton Smith and Cheri Nakamura. The company invests in small, relatively unknown Japanese firms.

Kyle Sackowski • The Honolulu Advertiser

The president and chief portfolio manager of Prospect Asset Management in Hawai'i Kai, and a self-proclaimed bottom-up stock picker, says the economic slump in Japan cannot last forever.

So, Freeze, 39, invests exclusively in Japanese companies, and his Prospect Japan Fund gained 11.9 percent in the first six months of this year, compared with a 6.45 percent decline in the broad Topix index of Japanese stocks.

The catch?

The Japanese companies he chooses are small, relatively unknown to most stock analysts said Freeze, who has an MBA from the University of Hawai'i and is fluent in Japanese.

He knows his investment strategy can be seen as risky, but Freeze says it pays to be different.

"When everyone is going one way and buying this popular stock, and you're going in the opposite direction, it gets really lonely," Freeze said. "Instead of picking the big companies that don't require a lot of work, like Microsoft or Yahoo! Japan, there are 3,000 smaller companies in Japan to choose from."

According to Merrill Lynch Japan, these 3,000 smaller Japanese companies make up only 13 percent of the Japanese stock market.

Prospect Asset Management, a 7-year-old company with six employees, has 25 holdings in small cap companies for its Prospect Japan Fund, a $120 million closed-ended investment fund listed in London.

About 50 percent of the fund's total equity is based on investments in small retail and service companies, said Cheri Nakamura, Prospect's marketing director.

Prospect picks variety of small cap companies
Cheri Nakamura, marketing director for Prospect Asset Management said some of its Japanese small cap companies are:
 •  Joint: A Tokyo condominium developer with a 36 percent profit growth next year, a $500 million market capitalization, and progressive management.
 •  Joyfull: The fastest growing restaurant chain, like Denny's or Zippy's, based in Kyushu with a 50 percent expected growth, a $420 million capitalization and consistent performance and excellent management.
 •  Nitori: A growing furniture retail chain, with a 30 percent recurring profit growth and $330 million capitalization, that specializes in low-cost furniture and coordinated interior goods.
 •  Arcland Sakamoto: A home center chain, like Eagle or Home Depot, that has an increasing range of higher-margin products, an 8 percent profit growth and a $250 million market capitalization.
"The Japanese economy has been bad for the last eight to 10 years," Freeze said. "That's why buying in Japan is not a gamble, because if you think it will be worse and worse forever, that's never happened in history, so that's just not natural."

Within that small cap universe, Freeze said he identifies the companies that offer the best growth at the lowest price. Then, Freeze or his three analysts, who are based in Tokyo, personally visit the companies for more information.

Freeze first went to Japan in 1981 as a missionary. He entered UH in 1986. He later returned to Japan where he worked for several securities companies. That experience has made it possible for Freeze to identify promising companies that other investors overlook.

"Thinking for yourself can be hard when you invest in these smaller companies because there's a lot more work to be done," Freeze said.

Prospect usually owns two to three percent of the Japanese companies in which they invest.

Eventually, Freeze said, the small cap companies will start to make more money, investors will take notice, the share price will rise and Freeze will sell his shares at a profit.

"We sell when everybody gets excited about the stock," Freeze said. "It's like being the first one at a party, and the first one to leave. That's how you make the money because you take the cash and use it for the next better idea."

When asked if he ever feared that his investment strategy may fail, Freeze said: "There are two emotions when you invest. Fear and greed. When you're feeling fear, that's when you should be more greedy. If you're feeling greedy, that's when you should fear."

And, his strategy seems to be working.

The fund was recently rated by J.P. Morgan as the best-performing Japan country fund on a risk-adjusted, annualized basis in dollars over the past three years, with a return of 35.1 percent, Nakamura said.