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Fund managers caught off-guard by poor market

INVESTMENT REPORTER

Japan was a big disappointment for many fund managers who had expected that the stock market would continue to post eye-catching returns last year.

A quick scan of the Japanese equity funds on Globefund.com shows many with a negative sign beside their one-year performance numbers. But then the Japanese benchmark index Nikkei 225-stock average advanced just 6.9 per cent in 2006, a far cry from the 40.2-per-cent increase in 2005.

There were some exceptions. The Altamira Japanese Opportunity Fund turned in a 5.71-per-cent return last year with a portfolio that features well-known names such as Honda Motor Co. Ltd. and Toyota Motor Corp., along with less familiar names as Shin-Etsu Chemical Co. Ltd. The fund has returned 8.19-per-cent annualized over the past three years. The next best performer was the CIBC Japanese Index RRSP Fund, up 5.25 per cent.

At the other end of the scale was the AGF Aggressive Japan Class Fund, whose top 10 holdings aren't generally quite as well known. It dropped 12.2 per cent last year. The Franklin Japan Corporate Class fund also didn't fare well last year. It was down 7.13 per cent.

All four funds however are off to a flying start this year with Altamira up 1.12 per cent, the AGF fund ahead 1.59 per cent, the CIBC index fund up 1.58 per cent and the Franklin fund ahead 1.83 per cent. And the Nikkei is advancing as well. Yesterday, the average hit a 6½ -year high in early trading, but finished down on the day.

The Japanese market seriously lagged other major markets last year in part because the Bank of Japan raised interest rates for the first time in six years. The central bank's key overnight rate was boosted from 0.069 per cent to 0.25 per cent, which immediately was read as a sign the long-suffering Japanese economy had finally wrestled the deflation beast to the ground and was firmly on the road to recovery.

A week ago, the central bank acceded to calls from senior government officials not to short-circuit the recovery by raising rates again.

Merrill Lynch & Co. Inc. sees the Japanese economy rising 2.2 per cent this year, up from an estimated 2.1 per cent in 2006 and 1.9 per cent in 2005. This year will mark the fifth year of positive economic growth for Japan, the longest stretch since the Second World War.

© 2007 The Globe and Mail. All rights reserved.

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