After 15 years of stagnation, the Japanese economy may finally be on track to a real recovery, according to Pauline Lee, manager of the $243-millionInvestors Japanese Equity. "I have seen this market over the last 15 years and there have been many false starts," she says.
In 2003, Lee's leeriness of unsustainable rallies led to underperformance. The fund lost 0.6% compared with a gain of 10.1% for Morningstar's Japanese Equity mutual fund index. However, low market volatility -- at 0.84, the fund's five-year beta is the lowest in the category -- is another fund hallmark. "My priority is capital preservation," Lee says. Although uncharacteristic for her, Lee's current optimism is widely shared. The decisive re-election of Prime Minister Junichiro Koizumi and his ruling Liberal Democratic Party (LDP) in Japan's Sept. 11 election is seen as a catalyst for sustainable economic growth.
Koizumi's victory has cemented plans to privatize the country's postal service, which oversees US$3-trillion in assets in its deposit/savings and insurance divisions. Historically, Japan Post assets paid for public projects with little regard for return on equity. Preferential treatment -- including exemptions from taxation and from requirements for insurance reserves and deposit insurance -- has hindered competition and economic growth, according to Lee.
Although privatization will take place in stages and be completed in 2017, anticipation of what Lee calls "creative destruction" has had positive repercussions already. Postal deposits are falling, with savings now leaking to other institutions and the wider economy. As well, public spending, which was 10% of GDP in 1990, now stands at around 5.8%, Lee says.
A native of Hong Kong with a long-standing interest in Japan, Lee speaks fluent Japanese. She attended the University of Hong Kong, where she obtained a Bachelor of Social Science degree, majoring in management studies and economics. She also holds the Chartered Financial Analyst designation.
The 39-year-old manager has always been based in Hong Kong and has covered Japanese equities since starting her career in 1987 with a Japanese brokerage firm. In 1990, she joined Wardley Investment Services, then the asset management arm of Hongkong and Shanghai Bank, where she worked for three years as a senior investment manager.
Before joining I.G. International Management (H.K.) Ltd. in 2000 at its newly opened Hong Kong office, Lee spent another three years as a senior portfolio manager with Carlson Investment Management Far East. Along with managing the largest Japanese Equity fund available in Canada since January 2000, she also oversees the Japanese equity portions of all Investors Group's Asian, global and global sector funds.
An Asian home base allows Lee to make quarterly trips to Japan for company visits. Hong Kong's role as a regional financial centre draws Japanese economists, strategists and sector analysts, and Japanese companies wooing Chinese investors.
"At different times, we pay attention to different aspects of the market," says Lee. The automotive sector, for example, is growing thanks largely to exports to the U.S., where Japanese companies have one-third of market share, and to China, where an economic boom is fuelling new car purchases.
The fund's top holdings include Honda Motor Ltd. and Toyota Motor Corp. Another pick, Kubota Corp., a maker of construction and agricultural machinery, is benefiting from U.S. housing starts and a burgeoning Asian agricultural sector.
Blending this growth mandate with a value style, Lee focuses from the bottom-up on management strategy, financial quality and valuation in looking for recovering companies with depressed share prices. She is supported by I.G.'s team in Asia, including portfolio manager Tim Leung, who oversees Asia-ex Japan picks. There are also two analysts and a trader.
The fund typically holds approximately 70 names. The top 10, which account for between 30% and 40% of the fund, are considered core holdings and held for the long term. But Lee will quickly sell stocks that no longer fit her criteria: in 2003 and 2004, portfolio turnover rates were 105% and 88% respectively.
An all-important sign of sustainability is that the Japanese recovery has its roots in the domestic sector, says Lee. She points to three indicators: a March 2005 report showing the first price increase in central Tokyo commercial real estate since 1990, a decline in bad loans on the books of Japan's banks, and GDP figures -- released the day following the election -- that outstripped all forecasts.
"Second-quarter GDP increased by 3.3%, three times the original government estimate, and two times the street estimate," says Lee. Growth is coming mostly from two main sectors, domestic consumption and capital spending, she observes. "This is very important because these two sectors together account for 70 per cent of the economy."
