Japan Rebounds

After almost a generation of decline, the Tokyo index is the world’s top performer in 2013.

Japan has been a graveyard for investment dollars for almost a generation. Astounding as it may seem, the average Japan fund has lost 4.62% annually over the past 20 years (to June 30). For every $1,000 invested back in 1993, you would have only $388 left today, if you’d hung around that long.

That’s why so many people have missed out on the huge rally in Japanese stocks we’ve seen this year. As of the close of business on Aug. 2 the Nikkei 225 was showing a gain of 39.2% for 2013, far ahead of any other developed market in the world. By contrast, the TSX, where Canadians have most of their money, was up a piddling 1.4%.

Japanese mutual funds have gone along for the ride. All were showing double-digit year-to-date gains as of Aug. 2 with most over 20%.

No one can say with certainty that this turnaround is the real thing. Japan has had several promising rebounds since the Nikkei collapsed in the late 1980s. But bad government policy, deflation, and an aging population have pulled it back into the doldrums every time.

But perhaps this time it’s different. The new Prime Minister, Shinzo Abe, has intervened forcefully with the Bank of Japan, pushing the governors to raise their inflation target, keep interest rates low, and introduce a program of quantitative easing. The net result has been a big drop in the value of the yen which has provided a much-needed boost to Japan’s exporters.

If this recovery turns out to be real, there is still plenty of time to take advantage of it. The Nikkei is still only at about one-third of its 1989 peak. There’s a huge amount of potential upside left.

I did an analysis of the pure Japan funds that are available and identified two that I think have good prospects. Here they are, with a warning: the pickings are pretty slim.

Altamira Japanese Opportunity Fund. If you are looking for dependability, here it is. This fund was a first or second quartile performer in every year but one from 2006 to 2012. It has lagged a little so far in 2013 with a year-to-date gain of “only” 21.25% but otherwise it has beaten the category averages on most occasions.

The portfolio is comprised mainly of mid-cap and large-cap stocks and is highly concentrated, with only 31 holdings. The management team of Nadim Rizk and Andrew Chan is not afraid to take large positions in companies they believe in. For example, as of the beginning of the second quarter the number one spot in the fund was held by Honda Motor with 8.57% of total assets. The portfolio also had positions of more than 7% in Fanuc Corp. (robotics), Keyence Corp. (sensors, microscopes), and Shimano Inc. (sports equipment).

This fund has been around since 1994 but it has been losing traction since hitting its peak in 1999 with a gain of 123%. Assets under management have been steadily dropping and are now down to about $7 million, so it’s a question mark whether owner National Bank will keep it alive. (All funds in this category have the same problem; not one has assets in excess of $100 million which is why many have disappeared from the scene over the years).

The small size of the fund may be a deterrent but the track record is good so it is worth a look. The minimum initial investment is $500 and the MER is 2.51%.

TD Japanese Growth Fund. This has been a fairly steady performer, never outstanding but never terrible either. Lead manager Charles Edwardes-Ker brings 20 years of experience in Japanese equities to the job. He focuses on large-cap growth stocks with names such as Mitsubishi, Toyota, Hitachi, and Bridgestone among the top ten holdings. The portfolio is heavily weighted to three sectors: industrial (35.1% of assets), consumer discretionary (20%), and financial (15.9%).

As of June 30, the fund showed a one-year return of 19.4%. The Aug. 2 year-to-date gain was 23%. That’s typical of what we see across the board with Japan funds – almost all the recent gains have been made since Mr. Abe came to power and put pressure on the central bank to make some major policy changes with a view to stimulating the economy.

This is another small fund (assets of $13.5 million). The MER is 2.84% and the minimum investment is $100.

Ask a financial adviser if either of these funds is suitable for your portfolio.


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