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Japan equity funds struggle in a sea of red ink

swon@globeandmail.com

What are we looking for?

How Japan-focused equity funds have fared in that country's two-decade-old bear market.

The screen

We looked at their performance for the year ended Sept. 30, and annualized returns for three, five, 10, 15 and 20 years. U.S. dollar and duplicate versions were excluded.

What did we find?

Not surprisingly, red, red and more red.

Old-timers such as Investors Japanese Equity and AGF Japan Class, have been bleeding annualized losses of 3 per cent and 2 per cent, respectively, over 20 years. Over one year, GWL Japan Equity, a segregated fund, was the worst performer with a 10-per-cent loss. Mackenzie Focus Japan Class, a mutual fund run by the same managers, shed 8 per cent. And these are among the survivors.

Some funds sold in 2002, such as CIBC Japanese Index RRSP, Franklin Japan Tax Class, ING Japan Equity, GGOF Centurion Japanese Value and Royal Japanese Stock, have thrown in the towel and disappeared.

So how does it feel to run a Japan fund? "Very, very lonely," lamented Mark Grammer, who co-manages the Mackenzie and GWL Japan funds, and has been tracking the Japanese market since 1991 when he was an institutional broker. "I missed the bull market."

It may seem odd, but Mr. Grammer doesn't even recommend buying his funds. "There are few compelling reasons to own the overall Japanese market," said the manager with Mackenzie Financial Corp. Japan has a rapidly aging population and low birth rate, while the country's debt is twice its gross domestic product, he said. "The government has historically shown very little interest in improving things."

It doesn't mean that investors can't make any money in a Japan fund because there are years when the Japanese market has rallied. "Short term, maybe you can make a few bucks," Mr. Grammer said. "If I were buying a Japan fund, it would be for a trade - not for an investment."

Luckily, the fund manager can find solace elsewhere. He has another job running the much bigger Mackenzie Universal Global Growth. This fund also owns some of the names in his Japanese equity funds, including NGK Insulators Ltd., Hitachi Metals Ltd., Omron Corp. and ASICS Ltd. Japan still has "some really high-quality companies that you can't buy anywhere else in the world and that are dominant in a particular niche," he said.

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HOW JAPANESE EQUITY FUNDS HAVE FARED OVER 20 YEARS

(As of Sep. 30)% returns to Sep. 30, 2010
NameLatest MERAssets ($-mil)1 Year3 Years5 Years10 Years15 Years20 years
GWL Japan Equity (M) NL3.241.3-10.04-15.01-9.69
Claymore Japan Index ETF C$ Hedged0.6810.1-9.21-23.20
Investors Japanese Equity-C2.87296.4-8.70-15.82-10.07-9.83-7.38-3.26
AGF Japan Class3.1319.4-8.52-14.32-9.62-9.22-3.44-1.74
Mackenzie Focus Japan Class2.512.9-8.14-13.68-8.52
TD Japanese Growth2.6820.9-7.36-10.08-7.06-5.55-3.39
Investors Japanese Equity Class-A2.727.9-7.25-14.87-9.42
CI Japanese Corporate Class2.385.1-6.21-9.46-5.79-5.89
Manulife Japan Class2.96.3-5.79-12.09-9.19
Altamira Japanese Opportunity2.46.4-5.46-9.45-5.94-6.05-0.81
Fidelity Japan-A2.694.9-5.15-12.09-7.88-8.92-2.09
BMO Japanese2.479.0-4.79-11.11-8.33-7.62-5.60
TD Japanese Index0.9818.1-4.33-9.69-5.76-6.40
NIKKEI 225 Total Return Index ($ Cdn)-5.29-7.43-3.71-6.25-4.90-2.08
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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