shinobi ii
TRANSCRIPT
忍
The Art of Guerilla Warfare in the Japanese Equity Market
By Michael Allen
Shinobi Shinobi
忍
Japan is Different!
2
-12
-10
-8
-6
-4
-2
0
2
4
6
1M 3M 6M 12M 2Yr 3Yr 4Yr 5Yr
Average Return to Momentum - 1995 to 2010
MSCI Japan MSCI World
忍
Momentum Returns
3
60
80
100
120
140
160
180
200
220
240
26004
/30/
1999
02/2
9/20
00
12/2
9/20
00
10/3
1/20
01
08/3
0/20
02
06/3
0/20
03
04/3
0/20
04
02/2
8/20
05
12/3
0/20
05
10/3
1/20
06
08/3
1/20
07
06/3
0/20
08
Just buying the worst performing decile and selling the best would double your money during a period when the market halved.
忍
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,0002/
1/20
01
6/1/
2001
10/1
/200
1
2/1/
2002
6/1/
2002
10/1
/200
2
2/1/
2003
6/1/
2003
10/1
/200
3
2/1/
2004
6/1/
2004
10/1
/200
4
2/1/
2005
6/1/
2005
10/1
/200
5
2/1/
2006
6/1/
2006
10/1
/200
6
2/1/
2007
6/1/
2007
10/1
/200
7
2/1/
2008
6/1/
2008
10/1
/200
8
2/1/
2009
6/1/
2009
10/1
/200
9
2/1/
2010
6/1/
2010
10/1
/201
0
2/1/
2011
6/1/
2011
10/1
/201
1
2/1/
2012
Nissha Printing Share Price and Book Value
Price 1.4x bvps 1.05x bvps 0.7x bvps Last Price
There is no fundamental explanation for the vast majority of profit opportunities in the Japanese market.
4
忍
Our advantage is our ability to choose the appropriate methodology from amongst quantitative, technical, and rigorous fundamental research, and to implement all three effectively.
5
忍 6
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
N-0
7J-
08M
-08
J-08
A-0
8O
-08
D-0
8F-
09A
-09
J-09
S-09
N-0
9J-
10M
-10
M-1
0A
-10
O-1
0D
-10
Low Frequency
Buy & Hold
Model
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1 6011
917
823
729
635
541
447
353
259
165
070
976
882
788
694
510
0410
6311
22
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
N-0
7J-
08M
-08
M-0
8J-
08S-
08N
-08
J-09
M-0
9M
-09
J-09
S-09
N-0
9J-
10A
-10
J-10
A-1
0O
-10
D-1
0
High Frequency
Buy & Hold
Model
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1 6011
917
823
729
635
541
447
353
259
165
070
976
882
788
694
510
0410
6311
22
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
N-0
7J-
08M
-08
M-0
8J-
08S-
08N
-08
J-09
M-0
9M
-09
J-09
S-09
N-0
9J-
10A
-10
J-10
A-1
0O
-10
D-1
0
Mid Frequency
Buy & Hold
Model
0
0
0
0
0
1
1
1
1
1
1
1 5811
517
222
928
634
340
045
751
457
162
868
574
279
985
691
397
010
2710
8411
410.0500.0
1,000.01,500.02,000.02,500.03,000.03,500.04,000.04,500.05,000.0
N-0
7J-
08M
-08
J-08
A-0
8O
-08
D-0
8F
-09
A-0
9J-
09S
-09
N-0
9J-
10M
-10
M-1
0A
-10
O-1
0D
-10
Low Frequency
Buy & Hold
Model
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
160
119
178
237
296
355
414
473
532
591
650
709
768
827
886
945
1004
1063
1122
0.01,000.02,000.03,000.04,000.05,000.06,000.07,000.08,000.0
N-0
7J-
08M
-08
M-0
8J-
08S
-08
N-0
8J-
09M
-09
M-0
9J-
09S
-09
N-0
9J-
10A
-10
J-10
A-1
0O
-10
D-1
0
High Frequency
Buy & Hold
Model
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
160
119
178
237
296
355
414
473
532
591
650
709
768
827
886
945
1004
1063
1122
0.01,000.02,000.03,000.04,000.05,000.06,000.07,000.08,000.09,000.0
N-0
7J-
08M
-08
M-0
8J-
08S
-08
N-0
8J-
09M
-09
M-0
9J-
09A
-09
O-0
9D
-09
F-1
0A
-10
J-10
A-1
0O
-10
D-1
0
Mid Frequency
Buy & Hold
Model
0
0
0
0
0
1
1
1
1
1
1
158
115
172
229
286
343
400
457
514
571
628
685
742
799
856
913
970
1027
1084
1141
Unique technical models: 1. Measure and predict
relative performance2. Multiple-trading
frequencies3. Parameters adapt to
characteristics of each stock. These are not one-size-fits-all models.
忍
Non-concentrated
Typical concentrations Some important rules• No position exceeds 3% of NAV,
or 30% of daily volume.• No long positions in assets labeled
as toxic by our balance sheet & cash flow analysis
• No industry exposure exceeds 6% above Topix weighting in either long or short book.
• No net industry exposure exceeds 6% of NAV
• 60 to 80 names per side• There is nothing wrong with cash
7
39%
Short
Other Positions
40%
Long
Largest 20 Positions
忍
Non-directional
Correlation to Topix is expected to be zero.
8
Daily Percent Net Return
y = -0.065x + 0.0009R2 = 0.0565
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%
Topix
Fund
Fund Linear (Fund)
Correlation to Topix
忍
Real-time Attribution I
Long and Short book returns dis-aggregated in real time
9
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%Sector Returns
Mkt Long Short
忍
Real-time Attribution IIReturns to sector allocation & stock selection dis- aggregated in real time.
10
-0.08%
-0.06%
-0.04%
-0.02%
0.00%
0.02%
0.04%
0.06%
0.08%
0.10%
Sector Attribution
Sector Allocation Stock Selection Total
忍
Real-time Attribution IIIStock specific return dispersion of long and short book measured and matched-up in real time.
11
-0.06%
-0.04%
-0.02%
0.00%
0.02%
0.04%
0.06%
0.08%
Real Time Return Dispersion
Long Short
忍 12
Preventing Volatility Spikes
Historical Volatility
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2/6
3/6
4/6
5/6
6/6
7/6
8/6
9/6
10/6
11/6
12/6
Short Long
Historical Volatility
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2/6
3/6
4/6
5/6
6/6
7/6
8/6
9/6
10/6
11/6
12/6
Short Long
Correlation of Volatility
y = 0.9591x - 0.0656R2 = 0.894
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.0 0.2 0.4 0.6 0.8 1.0 1.2
Correlation of Volatility
y = 1.0072x + 0.0457R2 = 0.9425
0.00
0.20
0.40
0.60
0.80
1.00
1.20
0.0 0.2 0.4 0.6 0.8 1.0
Before After
忍
Recognized a superior business model in Sugi Drug Stores before the street caught on.
13
Sugi vs Topix
80
100
120
140
160
180
200
A-0
6
O-0
6
D-0
6
F-07
A-0
7
J-07
A-0
7
O-0
7
D-0
7
F-08
A-0
8
Buy
Sell
忍
We were alone in understanding that despite 5 years of un-precidented growth, Japan’s blast furnace operators were still cyclical beasts incapable of controlling costs and extremely dependent on credit markets.
14
JFE vs. Topix
200
250
300
350
400
450
500
550
6009/
05
12/0
5
3/06
6/06
9/06
12/0
6
3/07
6/07
9/07
12/0
7
3/08
6/08
9/08
SHORT
SHORT
BUY
忍
Recognized the message from management of seemingly insignificant level of share repurchases.
15
Shionogi vs. Topix
0
50
100
150
200
250
300
9/05
12/0
5
3/06
6/06
9/06
12/0
6
3/07
6/07
9/07
12/0
7
3/08
6/08
9/08
BUY
忍
Recognized accounting flaws in leading producer of car batteries. Then played the decline in commodity input prices.
16
Yuasa vs. Topix
0
10
20
30
40
50
60
1/08
2/08
3/08
4/08
5/08
6/08
7/08
8/08
9/08
10/0
8
11/0
8
12/0
8
BUY
SHORT SELL
忍
In-depth industry analysis showed that in the depths of the greatest recession of our life-time, massive shortages were building in automotive seats.
17
0
0.5
1
1.5
2
2.507
/08
08/0
8
09/0
8
10/0
8
11/0
8
12/0
8
01/0
9
02/0
9
03/0
9
04/0
9
05/0
9
06/0
9
07/0
9
08/0
9
Toyota Boshoku vs Topix
Buy
忍
Took advantage of foreigners who bought on an ecology theme without knowing the company was about to suffer massive shortfalls in revenue and profit.
18
0
1
2
3
4
5
6
7
Ibiden vs. Topix
Short
忍 19
Daily ReturnsNet Performance
60
70
80
90
100
110
120
130
140
3/07 4/07 5/07 6/07 7/07 8/07 9/07 10/07 11/07 12/07 1/08 2/08 3/08 4/08
Model Topix
*Out-of-sample Test of Concept
忍 20
Daily Returns*
*Out-of-sample Test of Concept
80
85
90
95
100
105
110
TPX Net Return
忍 21
Guerilla Investing
“In Japanese history, a ninja ( 忍者 ) is a warrior specially trained in a variety of unorthodox arts of war, including scouting , assassination, espionage, sabotage, and various martial arts. Shinobinomono ( 忍びの者） is an older form of the word, meaning one who is stealthy. The character 忍 (pronounced neen or shino) depicts a sword above a heart.