Of Mutual Interest: Japan fund manager: Panic selling creates opening

The Associated Press The devastation in Japan is so massive that the reactionary selloff in global financial markets is hardly surprising. Yet it's important to remember that market slides triggered by natural disasters prove to be imperceptible blips to an investor who spends decades saving for retirement. That's the long-term thinking Taizo Ishida is employing as he guides the Matthews Japan mutual fund this week. After the threat of a nuclear catastrophe triggered a nearly 16 percent two-day drop in Japan's Nikkei 225 stock average, Ishida sees potential bargains among the Japanese stocks that are his fund's specialty. Still, the native of Japan can't dismiss the enormity of the widening disaster. "There will not be a short-term solution to any of this," says Ishida, the San Francisco-based fund manager. He leads the $87 million Matthews Japan Fund (MJFOX); as well as the $324 million Matthews Asia Pacific Fund (MPACX), with about 40 percent of its portfolio in Japanese stocks. No matter how insulated U.S. investors feel, the impact is inescapable. Japan is the world's third-largest economy. It has the third-largest stock market, behind the U.S. and United Kingdom. It had ranked ahead of the UK last week, according to Standard & Poor's. That was before Friday's disaster triggered a selloff. U.S. markets also fell, but not nearly as much. So far the Japanese crisis has had a muted impact on most investors because international stocks are a relatively small portion of many portfolios. However, within U.S. investors' foreign allocations, Japanese stocks are common. Mutual funds that specialize in overseas stocks hold about 16 percent of their portfolios in Japanese companies, on average, according to fund tracker Morningstar. Understandably, the most concentrated are the 13 that label themselves as Japan funds, which hold some $2 billion in investor assets. Below are excerpts from an interview with Ishida late Monday. That was before stocks continued sliding Tuesday, triggered by news that radioactive material had leaked from one crippled nuclear plant. Q: How do you view the Japanese stock sell-off? A: This disaster was a bad, once-in-every-thousand-years type of event. I believe the market reaction has been what one would expect. Initially, we've seen panic selling, mainly by Japanese institutional and retail investors, not so much by foreign investors. I've seen it many times -- like after the Sept. 11 attacks, and the Kobe (Japan) earthquake in 1995. But I'm managing funds for the long-term. I don't look at tomorrow, or even as near-term as the end of the first quarter, which is a couple weeks away. Q: What parts of the market where impacted the most? A: While the Nikkei 225 was down 6 percent on Monday, indexes of smaller-company stocks were down about twice as much, and some individual stocks were down 20 to 25 percent. It didn't make any sense, because many of these companies have nothing to do with the earthquake. There is selling, just because there is panic. Q: Describe how you're looking for investment opportunities in such a chaotic market. A: We're going through our watch lists of stocks we're considering buying or selling. I'm not really changing anything. If anything, I'll probably look for more opportunities to buy than to sell. Q: What's an example of a Japanese sector where stocks may be getting unjustly punished? A: Toshiba and Japan Steel Works are two holdings in my fund that are down sharply. They're big names in Japan's nuclear industry. Japan Steel Works is the world's largest manufacturer of reactor vessels that hold nuclear fuel. The markets are afraid that the whole idea of rolling out more nuclear plants over the next 10 to 15 years will be reconsidered. But I don't think that will be the case. These companies operate in overseas markets. They are hungry for power in fast-growing countries like China and India, and smaller countries like Vietnam and Thailand. These countries have to build power plants -- coal-fired, hydroelectric, or other options. And even after this disaster, nuclear will still be one of those options. Q: What about the market impact from manufacturing shutdowns? For example, Toyota is suspending manufacturing at Japanese auto manufacturing plants through Wednesday. A: It's hard to say for sure, but the impact should be pretty minor. Toyota has more production capacity overseas now than it has in its home country. Q: Japan's economy fell into a long decline in the early 1990s, in part because many companies couldn't adapt to the changing global economy. How will they manage to adapt after this disaster? A: If this had happened five years ago, I wouldn't be nearly as optimistic as I am now. The reason is that Japanese companies are more willing to change than ever before. They've been forced to become more adaptable, because of the challenges from other Asian countries like China and India. Q: Economic growth in Japan was largely flat in the last decade. This disaster is another complication as Japan tries to get its economy back on track long-term. What's your outlook? A: I think in the next 10 years, the trend will be up. I don't know what the trajectory will be, but Japan is recovering. I think Japan has more capacity to overcome this type of disaster than it did a few years ago. Published: Fri, Mar 18, 2011