Investing A.Y.O.R.
Rob Carrick
17:27 EST Saturday, Sep 13, 1997
JAPAN, land of the rising sun and a sinking stock market.
As a mutual fund investor, what do you need it for?
The answer is that Japan offers a chance to buy cheaply into a market that an increasing number
of experts believe has nowhere to go but up.
Share prices on the Tokyo Stock Exchange's Nikkei index have fallen from a peak of 39,000 in
1989 to 17,966 yesterday. Analysts now say a sustained move above 20,000 would be a moral
victory.
"I figure that the most important thing in investing is to try and buy low, and Japan is low right
now," said Peter Brewster, editor of the Canadian Mutual Fund Adviser, a biweekly newsletter.
How much longer Japan remains slump-ridden has been addressed in articles published lately in
Forbes and BusinessWeek magazines, the Forbes piece appearing under a headline reading
"Buy Japan Now!"
Both articles predicted better times ahead for Japanese stocks as a result of a pair of
developments -- a loosening of restrictive government regulations in key sectors such as financial
services, and an attempt by companies to provide greater accountability and value to
shareholders.
Where the Japan outlook runs into trouble is in an economic environment that can charitably be
described as rotten.
Consumer spending, housing starts and construction orders are all down, and overall growth in
the second quarter fell at a rate that would produce a shocking 11-per-cent decline if carried over
a full year.
Exports have been a source of strength for Japan, but even in this area the country is vulnerable
because 40 per cent of shipments go to the economically troubled countries of Southeast Asia.
Sherry Cooper, chief economist at Nesbitt Burns Inc., said economic conditions in Japan may
best be reflected in the level of interest rates. Three-month treasury bills are around 60 basis
points while the yield from 10-year bonds is about 200 points. (A basis point is 1/100th of a
percentage point.)
"I would caution that the big picture in the Japanese economy is going to be negative for some
time," Ms. Cooper said.
Some mutual funds that invest in a broad range of international equities seem to have adopted a
similar view. For instance, the $8.5-billion Templeton Growth Fund had just 1.66 per cent of its
assets in Japan as of July 31.
Lennox McNeely, manager of the $197-million Sceptre International Fund, said he has reduced
his exposure to Japan to 11 per cent from 18 per cent over the past six months. "We expected a
recovery and it just didn't come," he said.
Mr. McNeely said a turnaround in Japanese share prices will happen when companies in the
domestic sector of the economy become more profitable. The problem is that the shares of many
such firms are already expensive, driven up by investors who shun the low rates paid by fixed
income securities.
Still, several Japan-only mutual funds have had a good run this year. Among the hottest lately is
the relatively new $35.2-million CIBC Japanese Equity Fund, which returned 9.7 per cent in July
and 31.2 per cent for the 12 months ended July 31.
Mr. Brewster said his top choice is the $165.4-million AGF Japan Class, one of the oldest Japan
funds in the country.
Reflecting the ups and downs of the Japanese market, this fund has a 10-year average annual
compound return of 2.7 per cent and a five-year record of 11.6 per cent. Recent results for this
fund look quite good -- 6 per cent for July and 21.4 per cent for the year ended July 31.
His second choice is the $678.8-million Investors Japanese Growth Fund, another veteran that
has done reasonably well this year but has had its troubles in the past.
Scott Barlow, a mutual fund analyst at Midland Walwyn Capital Inc., recommends the AGF fund
and the $222.7-million Fidelity Japanese Growth Fund. He said both have come on quite a bit
this year as a result of their emphasis on exporting companies such as Honda, Sony and Canon.
The ideal approach to buying Japan funds is dollar-cost averaging, where a set amount of money
is invested each month or quarter, Mr. Barlow said.
"That way, the short-term volatility doesn't hurt you," he said. "And once you've accumulated
some shares, you'll do extremely well when the Nikkei heads north of 20,000 to stay."
How much of your total portfolio you want to invest in Japan funds depends on your risk
tolerance, but 5 per cent is probably a prudent limit.
An obvious risk in buying a Japan fund now is that the Nikkei may have further room to fall before
it mounts a sustained recovery.
Mr. Brewster said that's the price you pay for an opportunity to get in ahead of what could
possibly be the next great stock market rally. "One of the old saws about investing is that it's
better to be early than late."
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