Optimistic about Japan after nine bleak years

When it comes to profitable investments, timing is everything. This basic lesson will not have not been lost on managers of funds invested in Japan recently, when the time not to be in the market has been nearly the whole of the last 10 years.

But during 1999, the Japanese market suddenly woke up and started to roar again.

Paul Kirkby, manager of Global Asset Management's (GAM) Japan Growth Fund says: "I am more optimistic now than I have been for nine years. I am a big believer in restructuring and that is why the profit momentum in Japan is positive."

A Cambridge economics graduate, Mr Kirkby is an experienced Japanese equity specialist who worked for New Japan Securities in London and Tokyo before joining GAM as a senior fund manager in 1985. He was based in GAM's Hong Kong office, but returned to London in 1992. Mr Kirkby oversees GAM's Japanese investments, 12 funds, of which GAM Japan Growth is open to UK retail investors.

The recent recovery followed what Mr Kirkby describes as the "horrible" final quarter of 1998, when a sharp rise in the value of the yen had a severe effect on the performance of his hedged portfolios. "I focus primarily on absolute returns, which sometimes leads me to take a more aggressive stance than the competition, and that can result in periods of underperformance."

The rally of the past year, combined with a more relaxed hedging strategy, has seen a significant improvement in returns, based on a stock-specific investment approach. Mr Kirkby says: "I pay no attention to index sector weightings when constructing the portfolio, which means I can be radically overweight in the sectors we prefer and exclude companies in unfavoured sectors.

"The outlook for Japan continues to be good and 1999 should be seen as the first year of a bull market after an exceptional nine-year bear market, although profits in Japan are still very depressed. The outlook is for rising profits and, therefore, a rising stock market." A further boost is expected over the next couple of years from the maturing of savings accounts with the Japanese Post Office with a total value of £570bn. Much of this is expected to find its way into the Japanese stock market.

Mr Kirkby says: "In the last month, the fund has been treading water. We have seen sharply divergent market trends, with internet-related stocks surging forward and 'old Japan' stocks, such as heavy manufacturing, construction and banks, dropped to record lows.

"The fund is underweight in these areas, because we feel they already fully discount any recovery prospects, however slight these may be."

Given this stance, it is slightly surprising that the fund has about 29 per cent of its portfolio in financial stocks. "This figure includes 12 per cent in 'non-bank financials', such as our largest holding, ORIX, which is a leasing company, and 9 per cent in brokerage stocks, who stand to benefit from the flow of post office money.

Other key elements of the portfolio are electrical components companies, accounting for about 28 per cent of the total, and 20 per cent in "defensive" areas, such as pharmaceuticals and household goods.

Mr Kirkby says: "During 1999, the technology stocks really were the stars in Japan, but stocks in the Internet and software arena have reached valuations that have caused us concern for some time.

"We have been gradually reducing our positions in these sectors. I am more keen to play technology through some of the software companies, where you actually have earnings, rather than the dot.com-type companies.

"They are all about jam tomorrow."