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Japan funds soar in '99
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July 23, 1999: 5:24 p.m. ET
Restructuring, new management are breaking open staid Japan companies
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Change has been shaking the cobwebs out of Japan's economy, and perhaps no one is more thrilled than international fund manager Todd Jacobson.
Hundreds of Japanese companies announced massive restructuring plans this year, while others are trying approaches that are creative enough to wind up in a business school textbook, he said.
"The new president of Toshiba Corp. told me it's a revolution," said Jacobson, associate portfolio manager at Warburg Pincus Advisor Japan Growth Fund and Warburg Pincus Advisor Japan Small Company Fund.
The two funds are among the top four in year-to-date returns as of Thursday among nearly 1,200 international funds rated by Morningstar, a Chicago fund-tracker.
The growth fund is up 88.91 percent year to date as of Thursday, while the small company fund has earned 113.18 percent in the same time, Morningstar said. Japan stock funds were also big winners in the second quarter.
"It was always a question of 'when' Japan would turn around, not 'if' Japan would turn around," Jacobson said.
The returns are even more remarkable if you consider how the funds have performed in the past several years as Japan's economy languished. The growth fund eked out gains between one and two percent in the past two years, while the small companies fund earned 12.76 percent in 1998 but lost 25.41 percent in 1997.
"We started getting a sense that things were turning around in late 1998," Jacobson said.
One of the biggest problems among Japanese corporations was something Jacobson called "Japan, Inc." thinking. The idea is that companies were suffocating beneath inefficient management and nebulous business objectives.
Hitatchi, for example, a giant corporation that accounts for 2 percent of Japan's entire G.D.P., has 1,050 subsidiaries, he said.
"They say as Hitatchi goes, Japan goes," Jacobson said.
Companies finally started to make changes when they realized that government reform would not be enough to turn the economy around. So at Toshiba, one-third of the businesses are for sale. And at Hitatchi, management is looking at shedding some of its many units to see which businesses are best poised to profit in the years ahead.
"They are looking at key areas and where they can grow," Jacobson said. "What's the common thread here? There's a focus on getting higher returns. That's a key to everything we've seen."
Smaller companies, while not necessarily restructuring, are figuring out interesting ways to grow their businesses. For example, one holding, Jac, a used car dealer, is going onto the Internet and using its consumer data base to offer insurance.
"There's been a revolution of ideas and creative thinking in Japan," Jacobson said. "Enough companies had their backs against the wall that they've been forced to change."
And the future looks promising. Right now the funds' holdings have a return on equity of less than one percent. (The return on equity, or ROE, is the amount earned on a stock investment). But if the reforms are effective, the ROE will jump to 7 or 8 percent. He thinks the figure could go higher than 10 percent.
"It wasn't very long ago that France and Germany had ROEs of 2 percent, and now they're both in the double digits," Jacobson said.
Besides technology names like Toshiba, Hitatchi and Sony, he likes telecoms like Japan Telecom and cellular phone operator NTT Docomo.
"It's very rewarding," Jacobson said of the changes in Japan. "The hope was that the things we were seeing take place in the U.S. and Europe would come ashore in Japan, and it's gratifying to finally see it take place."
Fund companies may have been slow to go online, but accounting firm McGladrey & Pullen this week named 37 "outstanding" fund Web sites.
The sites are finalists in a contest to identify the top funds on the Web, the firm said. The finalists were chosen from among 350 sites based on information, customer service, design, quality, and connectivity.
The list includes familiar names such as Vanguard and Fidelity, as well as Royce Funds, TIAA-CREF, AIM Funds, and Berger funds.
The analysis found that 28 percent of the sites provide account access, 62 percent have daily net asset values (NAVs) and 29 percent have investor education.
Kinetics Asset Management didn't waste any time to make changes after the departure of manager Ryan Jacob from the high-flying Internet Fund. (Jacob is forming his own company and is introducing a new fund, called Jacob Internet Fund).
Kinetics plans to introduce two more Internet funds in the fourth quarter, said Steven Samson, president and chief executive.
One fund, tentatively named the Internet Infrastructure Fund, will focus on hardware and software companies that do significant business via the Web, such as Cisco Systems (CSCO). The other, tentatively called the Internet New Paradigm Fund, will own standard Internet names such as America Online (AOL), as well as companies that are making inroads on the Web, such as the New York Times (NYT).
Meanwhile, Kinetics wrote a letter to Jacob recently reminding him about regulations that prevent him from using the Internet Fund's record in advertisements for his new fund.
"Certainly the fund owns its investment performance record," Samson said.
An NASD spokeswoman said the regulations essentially mean that fund managers can not take their records with them.
"That's the spirit of the rules," said the spokeswoman, who didn't want to be named. "We operate on the premise that it's not all one person who is responsible for the success."
Kinetics also disputed some of the facts in Jacob's S.E.C. filing for the new fund. For example, Jacob said in the filing he served as chief portfolio manager of the Internet Fund from Dec. 20, 1997 through July 2. Samson said Jacob managed the fund from March 1998 through June 24. Kinetics removed Jacob from managing the fund when he resigned, Samson said.
"He was part of a team - it was not a one-man show," Samson said. "He took over a fund that was largely positioned. That portfolio did not change that much."
Efforts to reach Jacob for comment Friday were unsuccessful.
Japan funds may be soaring, but other parts of Asia are also enjoying good returns. Here are some winners and losers for the week in Lipper Analytical Services' Pacific Ex Japan Funds category. The funds invest in all parts of Asia except Japan.
At the top of the list is Eaton Vance Greater India Fund, class A shares, up 2.94 percent for the week July 15 through July 22 and up 45.50 percent year to date as of Thursday; followed by Eaton Vance Greater India Fund, class B shares, up 2.75 percent for the week and up 45.05 percent year to date; and Capstone New Zealand Fund, up 0.41 percent this week and up 8.59 percent for the year.
The top losers are: Pacific Basin Equity Fund, down 5.41 percent this week but up 41.41 percent year to date; followed by Asian Tigers Fund, investor shares, off 4.53 percent this week but up 35.98 percent year to date; and Asian Tigers Fund, common shares, which gave up 4.48 percent this week but gained 36.26 percent year to date. 
-- Staff Writer Martine Costello covers mutual funds for CNNfn.com. If you have any comments about mutual funds, you can contact her at cnnfn.interact@turner.com
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