I like market corrections. I like them even more when they are driven by fear rather than fundamentals in established market countries like the U.S., Europe and Japan.
Channeling Johnny Cochrane: When headline fears are breaking bad, good investments can be had. Me: Markets falling just because people believe in worst-case scenarios about still-unknown facts and impacts are prime hunting grounds for true investors.
Thanks to Greece (and no doubt other tea pot tempests), I think we’ll be able to hunt well all summer long, especially in European and Japanese stocks, with less risk than you might think — and better gains relative to our own market.
But please get me right: This is not the time to buy a Europe or Japan ETF. There are times when that might make sense. Just not now.
My recommendation about investing in Japan is to be very selective in what you buy. Don’t buy any Japan ETFs, like the iShares MSCI Japan ETF (EWJ) or, if you own one, trade it into an actively managed fund like Fidelity International Growth (FIGFX) (which has some Japan exposure; 15%) and/or for the purposes of this Japan-focused piece Fidelity Japan Smaller Companies (FJSCX) which is all Japan, all the time.
Yes, Jack Bogle, now is the time to invest in active management. A proven active manager who has delivered lower risk and lower losses can climb out of his or her shallower hole faster on his or her way to quicker and better profits. A manager who has also proven his or her ability to beat the benchmark on market upticks is a two-bagger.
One reason active managers will pay off: They pay attention not only to the companies they buy but the price they pay for them. Valuations here are loftier than in Europe and Japan, and among Japanese stocks, smaller-cap companies are better values than their larger-cap brethren. That’s why I think U.S. investors seeking to diversify and enhance their domestic returns should look at the eurozone and to the world’s second-largest developed economy, Japan.
With Japan’s concerted stimulus efforts in place, I think investors can afford to tightrope over expected near-term volatility. Coupled with a relatively favorable yen versus dollar pairing, exports ought to remain elevated enough to increase profits a little among larger-cap Japanese stocks. This is likely good news for jobs and spending among Japanese consumers, but with the Nikkei 225 setting recurring 15-year highs, I think the best investment opportunities reside in the often underfollowed and overlooked smaller-cap companies of Japan — the kinds of companies that are less exposed to currency issues and global events and profit most when their consumer base is employed and confident.
To make sure I wasn’t going too far out on limb, I sought expert advice to complement my own: I recently spoke to Joel Tillinghast at Fidelity Low-Priced Stock (FLPSX) about lofty valuations in the mid- and small-cap camps here, and whether he was finding more attractive valuations and investment opportunities (they don’t necessarily go hand in hand), in Japan.
In sum, he is.
Background check: Fidelity has had analysts on the ground in Japan for over five decades — and part of Fidelity’s management culture follows a Japanese paradigm known as kaizen or “continuous improvement.” Thanks in part to kaizen, when it comes to better information, better analysis and better execution of that analysis, nobody does it better (at least when it comes to Japanese stocks) than Fidelity.
For those who don’t know Joel, he’s a classic stock picker with a value bent believing (as I do) that one surefire way to mitigate risk is to be extremely selective about the price you pay for any given stock. He trained under the legendary Peter Lynch, and launched Low-Priced Stock back in 1989 … some of you who are reading this hadn’t even been born. (But if your parents had put $10,000 into FLPSX on the day it launched, it would now be worth $311,712 compared to $106,321 for the Wilshire 5000. Wah!)
Here’s what he told me:
“I continue to like international markets. There has been some price appreciation, but they also have been eclipsed by currency depreciation. Japan is still one of the more interesting markets for small cap stocks. In the Russell 2000, if you say 13 times earnings is sort of a cutoff for cheap stocks, a bit under 200 of them in the U.S. have P/Es under 13. And in Japan, there are a lot of smaller cap stocks with market cap under $2 billion, and1200 of them have P/Es under 13. So there’s a lot of low P/E stocks in Japan. Of course, you really have to pick and choose. There are a lot of sleepy, not very shareholder-oriented companies in Japan. But if you look, you can find companies that are run by owner/operators, where the CEO or other top management own 5% to 15% of the company, where they are growing and doing something different, and where they don’t get held back by the Japanese saying of, ‘The nail that stands up gets pounded down.'”
I am not exactly pounding the table to buy Japanese stocks today. But I do think any fear-driven pullback of 10% or more could create a healthy buying opportunity.
My picks for playing Japan?
There are three ways to go: stealthily through Fidelity Low-Priced Stock, more directly in Fidelity International Growth and directly in Fidelity Japan Smaller Companies.
Here’s a look at each:
Low-Priced Stock (FLPSX)
Manager: Joel Tillinghast
Still inimitable, still head and shoulders above even the best crop of giants you can find in the space, lead manager Joel Tillinghast is about as far a cry from leveraged stocks as you can get.
Joel invests in low-priced stocks, which are stocks $35 or less. While that sounds like a gimmick, it’s the secret to this fund’s genius, and was Joel’s brainchild, making him of one of the best managers of any generation. It can lead to a small-/mid-cap tilt. But it also can lean toward even mega-caps in ultra-bear markets (like the one we got in 2008).
The fund began trading in December 1989 and has a market value of more than $30 billion. Fees are 0.82%, or $82 annually for every $10,000 invested.
International Growth (FIGFX)
Manager: Jed Weiss
Jed Weiss invests in companies from around the globe that are believed to have above average potential for growth. Currently, over half of the holdings are in Europe. The fund began trading in November 2007 and has a market value of more than $700 million. Jed looks for multiyear structural growth stories and high-barrier-to-entry businesses at attractive valuations on his earnings forecast.
Japan Smaller Companies (FJSCX)
Manager: David Jenkins
Manager David Jenkins invests in this fund’s clever namesake smaller-cap Japanese stocks. The key to understanding this fund’s focus and scope comes down to understanding the “er” in “smaller.”
The market caps are similar to those of companies found in the Russell/Nomura Mid-Small Cap Index; a lot of room to maneuver toward more smaller-cap unproven growth plays or toward more established, real product, real earnings, real market share, real management mid-caps.
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