Some of the best-known international stock funds are shunning Japan.
Stephen Bepler, portfolio manager of the more than $7 billion Capital Research EuroPacific Growth fund, one of several portfolio managers speaking at a conference of Morningstar Inc. in Chicago, said: "Japan scares me. It's a government-sponsored and supported Ponzi scheme which has run out of new blood at the moment. I wouldn't invest in Japan for anything."
His fund has only 9% in Japan, all of it in small insurance-related stocks, by the recommendation of one of the firm's insurance analysts.
Jean-Marie Eveillard, portfolio manager of the $1.9 billion SoGen International fund and $400 million SoGen Overseas fund agreed. "There is almost no opportunity whatsoever in Japan today."
Overall, Mr. Eveillard is posturing for increased inflation.
"Circumstances don't look too favorable to me and prices look even worse," he said.
The International fund has 59% in stocks, of which 23% is in the United States and 36% is outside. Another 13% of the fund is in fixed income, where he said investors can achieve equity-type returns just by clipping coupons. Also, 10% is in gold-related securities and 18% is in cash. Mr. Eveillard is bullish on real-estate related securities in Germany, France, New Zealand, Argentina, the United States and Israel.
Mr. Bepler is bullish on Pacific markets excluding Japan as well as Mexico and other Latin American markets.
He also expects continental European markets to benefit from the developing economies of Eastern Europe.
A firm believer in value investing, Mr. Bepler noted that the four cheapest markets in 1984, when the fund began - Spain, Holland, Belgium and Hong Kong - have chalked up a 25% return in the past five years. The four most expensive markets - Japan, Singapore/Malaysia, Switzerland and Italy - earned a 17.5% compound-annualized over the period.
Mr. Eveillard expects to capitalize on market inefficiencies in Europe. For instance, non-voting stock sells at a 30% to 45% discount to voting stock in some markets, "a wide enough discrepancy for us to try to take advantage of it."
He also looks for hidden value as a result of accounting differences between the liberal English-speaking countries and the Teutonic continental European countries.
For instance, German companies use much shorter depreciation schedules than companies in the U.S.