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Eyeing a rebound in battered Japan

Manager sees promise after '06 correction

MUTUAL FUNDS REPORTER

TORONTO -- Japan, arguably the globe's most disappointing equity market of 2006, may hold the most promise for investors this year, said George Greig, portfolio manager with William Blair & Co. LLC.

"Japan, having had this big correction, looks more attractive going into 2007. It looks like a place where we want to do more research," Mr. Greig said in an interview yesterday.

As of Dec. 31, the GBC International Growth Fund, a $127.5-million fund overseen by Mr. Greig's Chicago team, has a 20-per-cent weighting in the Asian country. For the five-year period ended Dec. 31, the GBC fund has posted an annual average return of 12.9 per cent, well ahead of the international equity group average of 6.2 per cent.

The Nikkei stock average soared 40 per cent in 2005, buoyed in part by expectations that Japan was nearing the end of a long a deflationary run. Many money managers thought Japan's gains would continue through 2006, and it was a top international pick of many firms, including Deutsche Bank Securities Inc. and Bear Stearns Asset Management Inc.

Returns, in fact, were dismal and there's now some agreement the equity market got ahead of itself. The average Canadian Japanese equity fund lost about 1 per cent in value last year and the corresponding MSCI Japan index was up 6 per cent.

The beaten-up Japanese market fits the GBC fund's small-capitalization focus perfectly, Mr. Greig said. "There's a very rich pool of small companies in Japan. The Japanese markets have a lot of new listings on secondary markets," he said.

Despite Japan's poor returns, international markets are coming off a banner year with the foreign stock index MSCI EAFE returning 26.8 per cent. (The acronym stands for Morgan Stanley Capital International Europe, Australasia, and Far East.)

Improved corporate performance from global firms means the evaluation "gap has closed" between the U.S. market and the rest of the world, Mr. Greig told a Toronto audience of investors.

Nevertheless, there are growth opportunities to be found in three sectors that Mr. Greig expects will dominate the small-cap global equity market: retail-driven consumer stocks; financial equities benefiting from capital market growth; and industrial stocks making the most of infrastructure investment.

His top picks include the following stocks:

Singapore Exchange Ltd. -- operator of Singapore's securities and derivatives exchange.

Aeon Mall Co. Ltd. -- a large-scale shopping mall developer in Japan.

En-Japan Inc. -- a Tokyo Internet-based recruiting services firm.

© 2007 The Globe and Mail. All rights reserved.

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