Value managers and some U.S. pension funds have increased the weighting of Japan in their international equity portfolios in the past three months as they found valuations - from price-to-cash-flow to price-to-book-value - to their liking.
Money managers cited a range of companies, including car makers, producers of electronics and pharmaceutical firms, as fitting their profiles of good value.
Among the firms upping their weightings have been J.P. Morgan Investment Management Inc., which increased Japan's weighting to 16% from 14% in its international portfolios in November; Grantham Mayo Van Otterloo & Co. LLC, which increased its position to about 17% in November from 15% in October; and Morgan Stanley Dean Witter Investment Management, which increased its weighting to 21.5% in the middle of last month, from 15% from September. The move brought the firm close to neutral in Japan.
Japan's weighting in the Morgan Stanley Capital International Europe Australasia Far East index was 21.5% Dec. 18, up from 21.3% at the end of November.
One pension fund that manages international equities internally also joined the buying. The $18 billion Employees' Retirement System of Texas bought close to a net $30 million in a variety of Japanese equities in late October. In August, the Austin-based fund purchased $514,000 worth of Japanese equities, according to pension fund records. The fund currently has between $1.7 billion and $1.8 billion invested internationally, said Kathy Reissman, director of investments.
She said the fund's outside manager, Morgan Stanley Dean Witter, selects countries and the fund passively buys the countries' indexes for 50% of the fund's international equities program. The other 50% is passively invested to the EAFE index.
In U.S. dollar amounts, the fund's top four late October buys were: Toyota Motor Corp., $1.54 million; Dai Nippon Printing Co. Ltd., $1.47 million; Nippon Telegraph & Telephone Corp., $1.34
million; and Tokyo Electric Power, $1.22 million.
The fund's November stock purchases have not yet been released to the board, Ms. Reissman said.
Morgan Stanley Dean Witter increased its Japan exposure and decreased its Europe exposure to match the EAFE index because the earnings outlook had deteriorated in Europe, said Horacio Valeiras, a managing director in New York. Earnings are forecast to decline in Japan, he said, but the pace has slowed.
He added the Japanese government was taking the right steps in letting two banks - Nippon Credit Bank Ltd. and Long-Term Credit Bank of Japan Ltd. - fail.
One money manager taking a big bet in Japan, albeit over a longer period, is ValueQuest/TA LLC, Marblehead, Mass.
"We go where the value is. So far, for the first time in almost a decade, there's value in Japan," said Katherine Magrath, chief investment officer and managing director. Over the past five years, ValueQuest has had an average weighting between 4% and 5% in its international portfolio, she said. The firm started buying into Japan a year ago and has steadily increased the country's weight to 28% in the portfolio.
"A few years ago, the fundamentals weren't there," Ms. Magrath said. Now, some exporters and companies that produce consumer goods for the home market are "selling at substantial discounts."
ValueQuest's international portfolio contained a variety of companies such as automaker Nissan Motor Co. Ltd., Kikkoman Corp. and Canon Inc., she said.
Like other investors, she pointed to significant problems in banking and finance companies and said the portfolio has no such stock.
J.P. Morgan Investment Management recently found value in Japan by comparing companies' current stock prices with predictions on future earnings and cash flows, said Paul Quinsee, a managing director in New York.
"Values are better than they were," he said.
He wouldn't name specific companies recently bought or sold. But he cited as examples of attractive stocks companies with "decent balance sheets" such as automakers Toyota and Honda Motor Co. Ltd. But the firm is avoiding others such as Nissan, which is "buried under a mountain of debt and recently applied to the Japanese government for funding."
Like other investors, J.P. Morgan shifted out of Europe to Japan in its EAFE accounts.
"In Europe, returns were spectacular," he said. "We see a slowdown in the rate of earnings growth. European valuations are not particularly deep."
Grantham Mayo Van Otterloo increased its position in Japan over a period of six months, said Richard Mattione, who runs money for the firm's international active equity side rather than its quantitative side.
The active portfolio has never been overweight the EAFE benchmark, he said.
Despite the increase in weighting, he said, the more significant change came within the portfolio's makeup.
Grantham Mayo Van Otterloo is finding value in Japanese companies that are restructuring, he said.
"We're looking for companies that are going to do something with assets rather than die away or . . . just let people go," Mr. Mattione said.
The portfolio, which includes about 80 Japanese companies, contains a number of machinery companies, pharmaceutical makers and exporters.
But not all value investors upped their stakes in Japan. Brinson Partners Inc. has decreased its position, selling small positions in July and October, said Richard Carr, managing director and co-head of equities. At the end of November, Brinson had a 13% weighting in Japan in its international equities portfolio, or 7.3 percentage points under the benchmark. At the start of the year, Brinson was 5 percentage pointsM below the EAFE benchmark. At the end of November, Brinson was overweight in Australia and New Zealand by 3 and 1.5 percentage points, respectively, he said.
Institutional investors routinely stress they will not get out of Japan completely, despite the sliding equity markets.
Some investors, such as ValueQuest's Ms. Magrath, rattle off spectacular returns of 49% and 35% respectively for Kao Corp. and Kikkoman, for the year through mid-December. But the Nikkei 225 index had dropped 9.69% for the year through Dec. 22.
Other pension funds that actively manage international equities have made slight changes or made moves since August.
The Michigan Department of Treasury, Lansing, which oversees the $44 billion state employees' retirement funds, decreased its Japan weighting by 0.1 percentage point to 17.4% between August and October, said Penny Griffin, spokeswoman. The funds have $1.9 billion overseas.
New Jersey Division of Investment, Trenton, bought close to $200 million in Japanese equities in August, said Steven Kornrumpf, deputy director. The $68 billion fund currently holds $1.2 billion in Japanese equities. That makes up about 13% of its international equities portfolio, he said.
And more news may come of pension funds increasing their positions in Japan.
The State Teachers Retirement System of Ohio, Columbus, finds valuations in Japan at the moment "more attractive" than a couple of months ago, said Herbert Dyer, executive director. At the end of October, the $44 billion fund's Japan weighting was 19.2% of its international equity portfolio. "We like it more" in December than a couple of months ago, he said.
Like many funds that actively run international equities, Ohio State Teachers' reports investment changes to its board after a lag of one or two months.
Ohio Teachers' external managers run 60% of the fund's international equities, while internal managers handle 40%.
"We haven't made any major changes in the portfolio's structure, though we believe it is a better investment opportunity than it was a year ago," Mr. Dyer said.
