Japan may turn out to be a house of the rising sum

By Keiron Root

By Keiron Root

15 November 2000

Nick Edwards is a fund manager who takes a truly global view of his business, as befits a man who runs a UK-authorised OEIC (open-ended investment company) fund investing in Japan from an office in the US.

"Fund management at its best can be a very constructive activity. You are forming your own world view and putting a portfolio together in line with that," he says.

"I am a Japanese specialist but I also try to take a global view. We believe in the potential of the New Japanese Economy specifically as part of the global New Economy, although the Japanese market this year has eschewed technology in favour of value names."

Mr Edwards is well suited to the task of understanding the Japanese market. A first-class honours graduate in Japanese from Oxford, he started his career in 1983 as a securities analyst with the specialist Far Eastern house Jardine Fleming, before moving into fund management some seven years later. In 1995, he joined the New York-based management house Warburg Pincus, a private partnership that was acquired by Credit Suisse in July 1999.

The change of ownership created new opportunities for the Warburg Pincus team. Mr Edwards recalls: "Our background is as a US-based house and we didn't havea Japanese product for Europeaninvestors. We had been buildingup our Japanese investments over several years in a joint venture with Sumitomo bank, but the tie-up with Credit Suisse gave us a European platform."

One of the results was the launch of the Credit Suisse New Japan Fund, an OEIC sub-fund investing for growth with a particular emphasis on those companies at the forefront of the major structural changes that are taking place in the Japanese economy. "Typically," he says, "I run a concentrated portfolio with between 40 and 50 names. Given our intensive investment process, you have to have a concentrated list. There are four of us in the Japan team and, between us, we will have done 2,300 company visits this year, which we reckon is significantly more than anyone else."

The limited number of holdings also stems from the fact that Credit Suisse New Japan is an extremely small fund - just over £5m in size - a reflection of the poor performance of the Japanese market as a whole over recent years and the more recent aversion of investors to over-valued new economy stocks.

Mr Edwards adds: "About half of the fund is invested in technology. The other half is invested largely in non-bank financial and special situations, which are benefiting from restructuring. But we have no banks and we only added our first retailer a couple of weeks ago. We are looking for companies that are changing the way Japan does business or are changing with the changes in Japanese business practices and are generating value returns through that process. We have had a difficult period since the fund started but we have not changed our view."

Mr Edwards accepts that there have been severe problems with corporate Japan and argues that investors need to be confident that change will occur to consider the market. "The bull case for Japan, which we share, is that corporate earnings are going to increase and this will feed into corporate profit growth. We are anticipating year on year growth of 40 per cent. The economy is recovering in a staccato-like manner - two steps forward and one step back."

Another area of concern for foreign investors in Japan is the behaviour of the yen. Mr Edwards explains: "The currency decision is something we always have to look at. It is consistent with the optimistic view we have that returns should increase in Japan, that the currency should remain strong. It is strange that the yen has remained strong relative to the euro. But this is telling you that yen assets should produce stronger returns than euro assets."

As it approaches the end of its first six months, Credit Suisse New Japan is showing some pretty unattractive performance figures (down over 11 per cent since launch) against the backdrop of an under-performing Japanese market.

Mr Edwards says: "Japan is recovering from horrendous policy mistakes and inaction over the past few years and its recovery is steadily gaining momentum."

The problem is that few other outside investors have shared this view. But Mr Edwards points out: "This has not been enough to keep foreigners from selling, especially in the technology stocks which led the market in 1999. The global disillusion with technology has translated into a world market led by daily movements in the Nasdaq, compounding volatility and leading to the good being thrown out with the bad. As a result, when the Nasdaq bottoms, we expect Japan to out-perform."

Mr Edwards remains confident in the prospects for his chosen market. "At the heart of our optimistic view of Japan is the conviction that investment in technology can achieve the productivity improvements in Japan that have already occurred in the US."

He underlines this view by drawing attention to the Japanese government's attempts to encourage the New Economy. "Even the ridiculed scheme to issue all adults with a voucher for computer skills training will have a large multiplier effect: a similar scheme in South Korea has proved very effective."

He adds: "While the government's estimate that 30 million adults will enrol on these courses may be over-optimistic, it is fair to assume that training schools will need new equipment and many students will require new PCs and computer studies will also be compulsory in schoolsfrom 2001. The knock-on effect from all this increased activity willbe marked. ... [Moreover] deregulation of the domestic telecoms market is currently under discussion. A bold move there would be a key driver for growth."

Fundamental facts Fund manager: Nick Edwards

Age: 39

Fund: Credit Suisse New Japan

Size of fund: £5.36m

Fund launched: 26/05/2000

Manager of fund: Since Launch

Current yield: 0.00%

Initial charge: 5.25% (Investors may be able to buy at significantly lower cost via a discount broker)

Annual charge: 1.5%

Current bid/offer spread: n/a (open-ended investment company)

Minimum investment: £1,000 (subsequently £500)

Minimum monthly savings: £50

Standard & Poor's Micropal Rating (maximum *****): n/a (minimum three-year performance record required).

Fund performance (retail units - to 8 May 2000) (offer-to-bid, with net income reinvested). Since launch: - 11.35%

Source : Standard & Poor's Micropal