Japanese equity funds have had a disappointing 2000, with the vast majority of them losing value thr...
Japanese equity funds have had a disappointing 2000, with the vast majority of them losing value through the year. Those funds that managed to show a positive result despite horrible market conditions made a strong shift away from technology at the start of the year and started scouring the broader market, choosing companies on a bottom-up basis.
James Pulsford, manager of the Deutsche Japan Capital Growth fund, which came second over one year to 1 November 2000 in the Japan sector says: "We are entering into a period of investment adjustments. We started the year with a new economy large cap portfolio but the shift driven by new economy stocks became increasingly hard to justify and in the first few months we closed quite a lot of these bets off and moved into more defensive, old economy stocks."
For Deutsche, sector weightings are a function of fund stock selection. Sectors are analysed to point out where risk is highest and stocks are re-weighted.
Pulsford says: "For the fund, sector analysis is more of a form of risk control."
Last year the markets were kind to funds. This year, although the economy is improving, funds are not having it easy.
Pulsford says: "This year is undoubtedly more difficult than last year. There has been a very volatile and rotational market even though the economy has undoubtedly got better."
Tim Orchard, manager of the Mercury OST Japan fund, ranked fifth, agrees. He says: "Fundamentals continue to improve despite the fall in the market year to date. On average, corporate profit revisions continue to be upward and non-financial recurring profits growth in excess of 25% may be expected for the current fiscal year.
"The Fund performed relatively well year-to-date, and this follows on from a strong 1999. There was some rebalancing away from technology, media and telecommunications stocks at the beginning of 2000 following exceptional performance during 1999. This benefited performance as the stock market rotated back into value and cyclical shares and sold off technology and communications shares."
Pulsford noted this trend and thinks it will continue for electronics.
He says: "Within the electronics area, we can see a likely downturn, flattening out next year. Relative to four or five months ago, a fall is expected for mobile phones, as demand estimates have been cut, basically, because of a lack of success of WAP-based services within Europe."
Orchard continues: "The Japanese equity market has been weak year-to-date and this has largely been liquidity driven. Foreign investors have continued to take profits following the strong rise in the market during 1999. Furthermore, structural selling has continued as corporates seek to offload cross-held shares ahead of the new accounting regulations.
"The latter point is key: although it is difficult to quantify when this will end, it will ultimately create a more dynamic and active ownership structure for the market."
One particular possibility has been occupying some investors' minds is the likely MSCI move to free float indices next year. If this happens, it will mean that companies with substantial cross-ownership will have their rated market capitalisation reduced. The necessary re-weighting of all Japanese index trackers will exacerbate this.
Pulsford says: "People are aware of this, so to some extent it is discounted but MSCI has made changes before and it has always made a difference to the market."
Moreover, fundamentals continue to improve despite the fall in the market to date. On average, corporate profit revisions continue to be upward and non-financial recurring profits growth in excess of 25% may be expected for the current fiscal year. This would follow a similar result for the previous year.
"We believe the government's decision to end its loan guarantee program for smal businesses is also positive. Although it may increase the rate of bankruptcies in the short term as uneconomic businesses fail, it should allow the market to clear and help the efficient allocation of resources."
The fund moved out of technology, telecoms and the media at the start of this year, having profited by thefantastic performance of those sectors in the previous year. The market swung back round into cyclical shares and sold off on technology and communications, once again helping the fund sustain its performance.
There were also various stock-specific gains outside the major sector changes.
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