In the days following Japan's earthquake and tsunami last March, money manager Neil Hennessy had a decision to make. Should he continue with the trip to Tokyo he had planned for April, visit the managers of his Hennessy Select Sparx Japan funds and check on the country where his subadvisory firm manages about $50 million in assets? At the time, Tokyo still trembled with regular aftershocks, and fears ran high of radiation leaks from the nuclear plant to the north. Hennessy's wife and friends bluntly told him to cancel the trip.
But within hours of touching down at Narita International Airport, Hennessy knew he had made the right call. The nighttime view from his 27th-floor room at the InterContinental Hotel sparkled less than on previous trips, because Tokyo's neon lights had gone dark. But instead of being alarmed, Hennessy took the massive civic effort to conserve power as a sign of Japan's ability to surmount the crisis.
Robotics titans.Japan has seen its dominance challenged in the auto and consumer-electronics industries, but most analysts agree that it remains No. 1 in robotics.
Asian connectors. "An increasing number of Japanese manufacturers get up to 25 percent of their revenue from China,"
says Charles de Vaulx,
chief investment officer
of IVA Funds.
Savvy buyers. Japanese firms have a reputation for overpaying for acquisitions, but analysts say many firms today are wisely taking advantage of the strong yen to diversify strategically.
Global-production leaders. For years, Japan's aging and expensive labor force spurred firms to outsource their production. Now many companies do the lion's share of their production abroad, making them far more efficient, pros say.
Now, a year after that visit, Hennessy says that Japan may indeed be one of the best places in the world to find breakout stocks. It's the kind of statement, certainly, that merits a double take or two. After all, this is the same market that many investors have written off as the biggest value trap in the developed world. One of Japan's main stock indexes, the Nikkei 225, was down about 17 percent in 2011, about as much as the indexes of the world's other developed nations (except the U.S.; Standard & Poor's 500-stock index was flat, not including dividends). Long before the cataclysm of Mar. 11, 2011 a tragedy that took more than 15,000 lives, destroyed coastal towns and pummeled the country's industrial supply chain there were plenty of seasoned money managers who wouldn't touch Japan with a 10-foot samurai sword. Real estate prices in some areas have been on a 20-year decline. The country has struggled with an aging population, mounting debt and deflation. What's more, the strong yen has hurt exporters by making their products more expensive abroad.
But Japan is quietly attracting the interest of some big names in investing. The list includes everyone from William Kennedy, manager of the $8.1 billion Fidelity International Discovery fund, who says he's finding "incredibly good companies" there, to a guy named Warren the Oracle of Omaha says he's shopping for a "big investment" in the country. (Buffett doesn't do things small.) In all, dozens of managers are now flocking to Japan, looking to pick up great companies on the cheap, even if they're still wary of Japan's market as a whole. Indeed, what has emerged in the year since the great quake is a surprising, almost Dickensian plotline a tale of two recoveries. On the one hand, many experts and investors say they hold little hope for a swift resurgence of Japan's economy, yet many of those same folks see a slew of blue-chip stocks that are on the cusp of a bull run.
There are at least a dozen big companies, Japan watchers say, that have the potential to outperform even if the broad Japanese stock market continues to slump. These companies are pushing into new markets, outsourcing production and making smart acquisitions. They're no different from successful companies anywhere; they just happen to have their headquarters in Japan. Case in point: Nidec, a Kyoto-based maker of small motors for hard drives and other applications. The company's CEO and founder, Shigenobu Nagamori, is a true iconoclast, says Taizo Ishida, lead manager of the $132 million Matthews Japan fund. In his meetings with Ishida, Nagamori always says, "We have nothing to do with the Japanese economy."
Another strategy, say some fund managers, is to focus on firms in industries in which Japan remains the global leader. One favorite is Fanuc, a robot manufacturer, which makes the big arms that move cars through the production line. Japan's industrial firms will have to rely more and more on factory automation to replace aging skilled workers, say experts, while China has increasingly turned to robots, following years of double-digit wage inflation.
To be sure, even Japan's best-positioned companies aren't immune to a global recession. But in a sense, says Ishida, these firms may have a surprising edge in a low-growth environment; they've been dealing with one domestically for more than 20 years, he points out. The successful companies have adopted strategies to cope, such as looking beyond Japan's borders for economic opportunities.
While funds are the easiest way for investors in the U.S. to access Japanese stocks (most of which are not listed on U.S. exchanges), several brokerages, including Fidelity, Schwab and Raymond James, allow customers to buy stocks directly on the Tokyo or Osaka exchanges, with certain limitations. Ironically, though, it's another limitation that's prodding some investors to make the leap into Japan: There might not be much more money to lose. Japan's stock market has fallen a jaw-dropping 78 percent from its 1989 peak. The Nikkei 225 index now trades for less than its book value, or the sum of the companies' parts. The S&P 500, by contrast, trades for 1.9 times book value, according to FactSet Research Systems. Given how steep the fall has been, many managers say whatever downside remains is likely to be modest. That's partly why Josh Strauss, manager of the $200 million Appleseed fund, decided to invest after last year's quake. "The risk that worries me is dead money," Strauss says. "The risk in this market is the kind I'm willing to take."
But within hours of touching down at Narita International Airport, Hennessy knew he had made the right call. The nighttime view from his 27th-floor room at the InterContinental Hotel sparkled less than on previous trips, because Tokyo's neon lights had gone dark. But instead of being alarmed, Hennessy took the massive civic effort to conserve power as a sign of Japan's ability to surmount the crisis.
Four Japanese Themes
Many pros say it's a bad idea to buy the broad Japanese stock market; rather, you need to pinpoint a strategy. Some options.Robotics titans.Japan has seen its dominance challenged in the auto and consumer-electronics industries, but most analysts agree that it remains No. 1 in robotics.
Asian connectors. "An increasing number of Japanese manufacturers get up to 25 percent of their revenue from China,"
says Charles de Vaulx,
chief investment officer
of IVA Funds.
Savvy buyers. Japanese firms have a reputation for overpaying for acquisitions, but analysts say many firms today are wisely taking advantage of the strong yen to diversify strategically.
Global-production leaders. For years, Japan's aging and expensive labor force spurred firms to outsource their production. Now many companies do the lion's share of their production abroad, making them far more efficient, pros say.
But Japan is quietly attracting the interest of some big names in investing. The list includes everyone from William Kennedy, manager of the $8.1 billion Fidelity International Discovery fund, who says he's finding "incredibly good companies" there, to a guy named Warren the Oracle of Omaha says he's shopping for a "big investment" in the country. (Buffett doesn't do things small.) In all, dozens of managers are now flocking to Japan, looking to pick up great companies on the cheap, even if they're still wary of Japan's market as a whole. Indeed, what has emerged in the year since the great quake is a surprising, almost Dickensian plotline a tale of two recoveries. On the one hand, many experts and investors say they hold little hope for a swift resurgence of Japan's economy, yet many of those same folks see a slew of blue-chip stocks that are on the cusp of a bull run.
There are at least a dozen big companies, Japan watchers say, that have the potential to outperform even if the broad Japanese stock market continues to slump. These companies are pushing into new markets, outsourcing production and making smart acquisitions. They're no different from successful companies anywhere; they just happen to have their headquarters in Japan. Case in point: Nidec, a Kyoto-based maker of small motors for hard drives and other applications. The company's CEO and founder, Shigenobu Nagamori, is a true iconoclast, says Taizo Ishida, lead manager of the $132 million Matthews Japan fund. In his meetings with Ishida, Nagamori always says, "We have nothing to do with the Japanese economy."
Another strategy, say some fund managers, is to focus on firms in industries in which Japan remains the global leader. One favorite is Fanuc, a robot manufacturer, which makes the big arms that move cars through the production line. Japan's industrial firms will have to rely more and more on factory automation to replace aging skilled workers, say experts, while China has increasingly turned to robots, following years of double-digit wage inflation.
To be sure, even Japan's best-positioned companies aren't immune to a global recession. But in a sense, says Ishida, these firms may have a surprising edge in a low-growth environment; they've been dealing with one domestically for more than 20 years, he points out. The successful companies have adopted strategies to cope, such as looking beyond Japan's borders for economic opportunities.
While funds are the easiest way for investors in the U.S. to access Japanese stocks (most of which are not listed on U.S. exchanges), several brokerages, including Fidelity, Schwab and Raymond James, allow customers to buy stocks directly on the Tokyo or Osaka exchanges, with certain limitations. Ironically, though, it's another limitation that's prodding some investors to make the leap into Japan: There might not be much more money to lose. Japan's stock market has fallen a jaw-dropping 78 percent from its 1989 peak. The Nikkei 225 index now trades for less than its book value, or the sum of the companies' parts. The S&P 500, by contrast, trades for 1.9 times book value, according to FactSet Research Systems. Given how steep the fall has been, many managers say whatever downside remains is likely to be modest. That's partly why Josh Strauss, manager of the $200 million Appleseed fund, decided to invest after last year's quake. "The risk that worries me is dead money," Strauss says. "The risk in this market is the kind I'm willing to take."
