By David Randall
NEW YORK, May 23 (Reuters) - Japan's white-hot stock market
has investors crowding in, but there are a few reasons why you
shouldn't follow the pack.
It's a temptation, of course. The benchmark Nikkei 225 index
is up 50 percent for the year, more than any other developed
market, and nearly triple the approximate 17 percent gain for
the Standard & Poor's 500 stock index through May 21.
This streak prompted investors to put a net $9.1 billion
into Japan equity funds and exchange-traded funds in April. In
fact, that's the bulk of the $9.9 billion investors added to all
sector funds during the same month, according to Lipper data.
Yet investors might already hold more of Japan in their
portfolio than they think. The average international mutual fund
has 17.1 percent of its assets invested in the country, or
nearly a fifth of the fund's portfolio, according to Lipper, a
unit of Thomson Reuters Corp.
Adding a Japan-only stock fund or ETF on top of that at a
time when the market has already seen big gains might set the
stage for larger losses once the market cools, analysts said.
The Japanese economy grew at an annualized 3.5 percent in
the first quarter.
"People are clearly thinking that the monetary policy Japan
has put into place has at least the likelihood of turning
the economy around," said Kate Warne, market strategist at
Edward Jones. "But expectations have run a bit ahead of
reality."
Nevertheless, there are ways to benefit from Japan's rising
stock market without taking on concentrated risk. Here are two:
MUTUAL FUND STAKES
One big reason why investors in diversified mutual funds
shouldn't increase their stake in Japan is that their managers
might have already done it for them.
The $33.6 million TCW International Small Cap Fund
, for instance, has about 31.6 percent of its portfolio
in Japanese equities, according to Morningstar data,
nearly double its 16.4 percent stake in March of last year.
The $1.1 billion Wasatch International Growth fund
, meanwhile, more than doubled its stake in Japan over
the last 11 months. The fund now has about 15.5 percent of its
assets in the country, according to Morningstar, up from 7.1
percent as recently as June of 2012.
(These figures reflect both new purchases on the part of
fund managers and the rising value of assets they held prior to
the market surge.)
Funds such as the $212 million Wells Fargo Advantage Asia
Pacific Fund, the $992 million Oppenheimer
International Value Fund, and the $4.1 billion William
Blair International Growth Fund have all increased
their Japanese weighting by seven percentage points or more
during the last year as well.
Add it together and "it's another reason to be skeptical of
flavor-of-the-month or flavor-of-the-quarter funds," said Bill
Rocco, a senior fund analyst at Morningstar. "Ideally, you want
a broad foreign fund with a manager who said last October: 'Wow,
I think there's some real opportunity in Japan.' And now they're
reaping the rewards."
Investors might want to consider multi-cap core
international funds such as the $17.3 billion Oakmark
International Fund and the $8.8 billion Artisan
International Value Fund. Both funds have 10 percent
or more of their assets in Japanese stocks and have
category-leading returns of an annualized eight percent or more
during the last five years, according to Lipper data.
BROADER ASIAN PLAY
Any pickup in Japan's economy will likely benefit Singapore,
South Korea and China as well, so funds that invest broadly in
Asia offer another way for investors to reap the rewards.
Kenneth Lowe, a co-manager of the $4.9 billion Matthews
Asian Growth and Income Fund, said the fund hasn't
been adding to its overall allocation of Japanese stocks.
Instead, the fund, which is up an annualized 14.4 percent during
the last three years, is keeping about 10 percent in Japan, with
the largest stake of the portfolio invested in China.
The fund's largest positions are in companies such as
Malaysian financial firm AMMB Holdings Bhd and
Singapore based Ascendas Real Estate Investment Trust,
which should benefit from the powerful combination of the
region's rising middle class and continued economic growth.
Lowe, who stresses his fund invests on individual merits
rather than macro trends, said Japan's rally could be sidelined
if proposed reforms to the labor market and trade policies fail.
"We're still not sure of what reforms will look like," he
added.
Source: http://news.yahoo.com/play-despite-hot-stock-market-avoid-japan-122958578.html
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