3 Funds Capitalizing on Japan’s Recovery

07/28/2011 2:30 pm EST


Given that the US debt-ceiling conflict and Eurozone debt woes are dominating the headlines right now, it’s easy to forget that Japan—the world’s third-largest economy—was top of our minds just a few short months ago, notes Esther Pak of Morningstar.com.

Although Japan has made great strides toward rebuilding its infrastructure and economy since the earthquake, tsunami, and subsequent crisis at the Fukushima nuclear reactor in March, investors remain divided about the country’s economic prospects.

Even though many investors have taken flight from Japanese stocks, others have been optimistic about Japan’s recuperation prospects, and have scrambled to take advantage of what they perceive to be rock-bottom stock prices.

For example, March 2011 saw record inflows into Japanese equity mutual funds and exchange traded funds. And by the end of April, Japan stock funds took in more than $210 million.

We sifted through the foreign large- and small/mid-cap categories, as well as the world-stock category for non-institutional offerings that had a more-than-20% stake in Japan. (For comparison’s sake, the average foreign large-blend fund has about 15% in Japan.)

On the fees front, we required that funds have price tags below their category averages. We then filtered for offerings with Analyst Reports available and sought funds with Morningstar Ratings for funds of 4 stars or higher.

Finally, we called up offerings with managers that have helmed the fund for at least 5 years. Below, we highlight three of the passing funds.

MFS International Value (MGIAX)
Currently, this broker-sold foreign large-value fund is overweight in Japan: Its 25.22% stake there is substantially heavier than its typical peer’s weighting of 17% and the MSCI EAFE Index’s 19.92% stake.

Investors have reason to trust management’s convictions: Long-tenured skippers Barnaby Wiener and Benjamin Stone subscribe to a straightforward value approach, seeking healthy, profitable companies that show compelling evidence of a prospective turnaround.

Maintaining a portfolio of only high-quality, sustainable firms has provided shareholders with excellent downside protection—all without compromising performance. All in all, investors will find a strong contender for a core international holding in this offering.

Nuveen Tradewinds Global All-Cap (NWGAX)
Manager Dave Iben and his team of analysts invest with conviction, while sticking to a disciplined approach at this broker-sold world-stock fund, seeking companies that are trading at steep discounts to their estimates of their intrinsic values.

The fund’s heavy 23% stake in Japan (3 times more than the category average) epitomizes Iben’s contrarian tack. For example, when others were dropping East Japan Railway following the natural disasters that struck Japan, Iben picked up shares—arguing that the company’s earnings were intact. (The firm lands among the portfolio’s top ten holdings).

Moreover, Iben does not shy away from making sector bets; currently, the fund has a hefty exposure to basic materials, gold mining companies in particular.

Despite its bold strategy, which has caused the fund to struggle recently, the fund fits the bill as a flexible, go-anywhere fund for investors who can tolerate bouts of short-term underperformance.

Oakmark International (OAKIX)
Like the manager of the aforementioned fund, veteran lead manager David Herro subscribes to a deep-value discipline at this foreign large-value offering, and his portfolio often includes emerging-markets stocks, small caps, and fallen growth stocks.

Its flexible mandate means that its sector and country weightings can diverge significantly from those of its peers. Case in point: The fund has 26% of its assets invested in Japan compared with the category average of 17%.

Herro and his management team focus on a plethora of overlooked Japanese firms trading at steep discounts to what they think they’re worth. Such names incurred steep losses immediately following the March disasters, but the fund was able to recover nicely.

Moreover, the fund’s long-term returns rank in the category’s top decile in every trailing period of more three years. Adding to the fund’s appeal, Herro is heavily invested in the fund with more than $1 million of his money in the pool.

Investors will find this offering a compelling core option for foreign-equity exposure.

Read more from Morningstar.com here…

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