Manager of single-nation mutual fund in bind with Japanese market's slide


Mutual fund investors are almost always told to invest for the long term, and be patient. Even so, when you're a portfolio manager and your fund is down more than 20 percent for the last 12 months, you have to make that point more often than usual.

That's what's happening to Elizabeth Allan, who manages Scudder Stevens & Clark's Japan Fund. Her challenges are similar to those of people running the two or three other Japan-only funds, including the DFA Japanese Small Company fund and the G.T. Japan Growth fund.

Managers of more diversified international funds, and even Pacific Basin funds, can minimizing their exposure to Japan or eliminating it altogether, these managers have to stick with it through thick and thin -- lately, very thin. Since its December 1989 peak of almost 39,000, the Tokyo Stock Exchange's Nikkei index has fallen about 60 percent, and Ms. Allan's Japan fund has lost about 30 percent.

That doesn't seem to bother a lot of investors, though. The fund is pulling in $5 million to $6 million every week, money that has to be invested. "I'm buying stocks every week," Ms. Allan said.

Not all of the money is going into stocks. In better times, Ms. Allan would have less than 5 percent of the fund's assets in short-term cash investments. Today, 20 percent of the nearly $364 million in fund assets is in cash.

In some ways, single-country fund managers have a problem similar to that of anyone who has to stick to one market sector. Just ask the people who are running biotech funds. For them, winning means not losing as much as the averages.

Many international and Pacific Basin fund managers are avoiding Japan, but that's fine with Ms. Allan. "In a perverse sort of way, it pleases me when I hear of others giving up on Japan," she said. "The real trick is to find companies that are going to do well even when the economy is slow."

Some of those companies, she said, are in businesses that are poised to take advantage of important economic changes. For example, she notes, the archaic system of a long chain of wholesalers and distributors moving a product from the manufacturer to the consumer is breaking down. This change got a big push last year when Toys 'R' Us, the big U.S. chain, opened its first store in Japan and began buying toys directly from manufacturers.

Now, she said, "more retailers are following Toys 'R' Us example and buying direct from the manufacturers. The Japanese don't need that chain any more and they can't afford it." That suits Japanese consumers just fine, as they are becoming less concerned about quality and focusing more on price.

Consumers' interest in price is a direct result of the economic slowdown in Japan, Ms. Allan notes. Japanese unemployment remains very low by U.S. standards, at a little over 2 percent, but there is less overtime, and year-end bonuses have been reduced at many companies.

Playing on this trend, Ms. Allan has invested in companies such as Aoyama Trading Co., a discount clothing retailer that is expanding in the suburbs, and Autobacs Seven Co., a retailer of accessories to people who keep their cars longer.

Like the United States, Japan will be slow in achieving an economic recovery, Ms. Allan believes, but she thinks it will come. "The clock is ticking on the business recovery," she said. "We probably won't see it in '92, but '93 appears to be a pretty good bet."

Meanwhile, she is trying to make sure the Japan Fund at least keeps falling less than the Nikkei by avoiding many companies that make up that index, particularly big banks.

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