Japanese Funds, Hot in ‘99, Turn Cold in 2000

U.S. tech funds shared the top-performance list in 1999 with many Japanese small-company stock funds.

But this year, Japan has become the land of the falling return for U.S. investors.

Warburg Pincus Japan Small Company Fund, which gained 329% in 1999, has plummeted 53% so far this year.

Fidelity Japan Smaller Companies Fund, which returned 237% in 1999, also ranks near the bottom of the Pacific-region-fund charts this year, down 35%.

Not only have many smaller Japanese tech shares slumped this year, but the yen’s weakness against the dollar has worsened returns for U.S. investors in Japan.

L. Roy Papp, who with daughter-in-law Rosellen, runs the $21-million Papp America-Pacific Rim Fund, said simple “momentum� buying--not a rebounding economy--drove Japanese stocks higher last year, and particularly many smaller Japanese tech shares.

“All of the economists and forecasters thought that Japan had turned, so they all jumped in and ran it up, they also ran the currency up,� said Papp, a U.S. director and ambassador to the Asian Development Bank from 1975 to 1977. “It turns out Japan hadn’t turned yet. It’s turning now, but it’s going to take a couple years.�

James Bogin, manager of the Matthews Japan Fund, said his fund’s comparatively light tech stock position has helped it hold its loss year to date to about 3%.

“We don’t invest in companies that aren’t profitable,� Bogin said, adding that some Japan funds last year bought stocks of technology and Internet companies with no history of profitability and continued to buy others that had been bid up to 500 or 1,000 times earnings.

Still, Bogin has been raising his tech stake, which now stands at 20%, up from 12% at the beginning of the year.

Japanese securities firms and drug companies did well early this year, and Bogin’s fund benefited from that as well as from good performance from a couple of its consumer plays such as Belluna Co. Ltd., a Japan-based mail order company offering clothing and household goods that has returned 85 percent in 2000.

“It was like the States a bit, people were buying companies with no earnings,� Bogin said, adding that some of his tech holdings were Fujitsu Ltd., down 36% this year, and Woodland Corp., a developer and maker of software, hardware and Internet-related applications, down 12%.

Though many Japanese companies have undertaken restructurings to enhance profits and the overall economy is in the process of recovering, a full economic recovery will take several years, he said.

“They are having a bull market in corporate profits, and a bear market in government policy,� Bogin said. “Japan’s corporate profits are great, companies are doing it. People are going to see over the next year corporate profits grow at high double-digit rates.�