The best performing funds for the Japanese sector in 2002 held companies that had Western-style man...
The best performing funds for the Japanese sector in 2002 held companies that had Western-style management systems in place and focused on exporting goods out of the country.
The DWS Invest Japanese Equity fund was ranked number four in the sector for the year. It posted returns of -5.87%.
Hansjoerg Pack, senior fund manager of the DWS Invest Japanese Equity portfolio, attributes the good performance to choosing stocks that are export-driven and fit well into global portfolios.
For example, one stock held was Honda. Pack says the company was chosen because it has gained market share in the US by shifting production from Japan to the US.
Another company that has been gaining market share in the US and Europe is Cannon. It has moved production to China to cut costs and has benefited from its merger with Hewlett Packard.
Pack chooses stocks by using a top-down and bottom-up approach.
However, decisions are mainly based on the bottom-up stock-picking strategy. He attributes this to the good performance.
The bottom-up stock-picking approach looks at P/E ratios and enterprise value. A company must be committed to increasing shareholder value and have a Western-style management approach. Balance sheets must be strong.
Most companies that performed well in the portfolio had one thing in common ' good management and strong balance sheets in deflationary conditions.
Pack looks for companies with a low debt to equity ratio or high cash positions on balance sheets.
The company must also fit into DWS's global macro view. For example, if there is negative sentiment on the banking sector, then it is hard for these types of stocks to be included in the portfolio. The fund has not invested in banks due to bad debt.
The AIG/SAM International Japan large cap equity fund performed well and was ranked in the sixth position. Its performance rating was -8.38%.
Robert Howe chairman and chief investment officer of AIG Global Investment Corp, says the fund performed well because of its risk management strategy.
According to Howe, to create a good portfolio in a bear market stopping losses and managing risk is the key.
Howe says: 'We have managed the risk in Japanese equities by, first, holding a limited number of stocks, 35 to 45, not 80 to 100, that replicate the index and contain zombie companies such as the banks; and, second, being disciplined when any of those concentrated holdings start to fall.
'We have two stop-review points on every position we hold, monitored by our trader and the account manager.
'At each stop review point the fund manager, trader, and chief investment officer discuss the stock, either just the three of us or with the full fund management/research team. We check the industry fundamentals, the company's competitive position/product cycles, analysts earnings estimates, who is buying and selling the shares day-to-day.'
According to Howe, if the fundamentals check out, solid shares are kept or added too. If fundamentals are turning negative, the position is sold.
At the second, lower-stop review point, the discussion becomes much more pointed, and often the stock is sold because by then fundamentals are more clearly negative, or there is something the team does not understand about the stock.
Howe says this process has protected his clients all year and helped the portfolio out-perform.
The portfolio also focuses on both growth and value stocks.
Howe says: 'We look at stocks across the growth and value spectrum, buy value stocks with triggers to cause value to pay off for us, and we also buy growth stocks, but with clear sell triggers if growth stumbles.'
One area that has performed well for the portfolio is the automotive industry.
Howe says: 'We perceived that the auto industry was restructuring and that select parts companies were gaining auto clients outside their industrial group, adding new products in electronics that diversified them sensibly from one type of customer.
'Our largest sector bet since mid-year has been these auto parts companies. And in each case it was a bottom-up decision based on that company's low valuation and positive triggers in new products and customers.'
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