* Recent asset flows into Japanese funds may reverse
* Stock plunge likely erased chunk of 1-yr fund returns
* Cheap Japan stocks also offer opportunities -fund managers
By Nishant Kumar
HONG KONG, March 14 The plunge in Japanese
shares threatens to arrest a nascent revival of investor
interest in the country, after wiping out a big chunk of
Japan-focused equity funds' one-year returns.
Some of the $1.5 billion that flowed into the funds such as
Fidelity's Japan Advantage fund and Nomura's Japan Brand Equity
fund over the past three months, may reverse course as investors
weigh the economic impact of the country's worst disaster since
World War Two.
The resurgent interest, after $3.2 billion of outflows from
the funds last year, has been put to test by the 8.9 magnitude
quake and the ensuing tsunami, which may have killed more than
10,000. Japan has also been grappling with radiation leak from
an earthquake-damaged nuclear power plant.
"The market will be very cautious about buying Japanese
shares even though the value of Japanese shares are attractive
after falls," said Hiroshi Arano, adviser at Mizuho Asset
Management in Tokyo.
"The market will see the condition of the actual state of
the Japanese economy over the next two to three months, before
making any concrete decision."
The benchmark Nikkei average slumped 6.2 percent on
Monday. The massive selloff on the Tokyo Stock Exchange wiped
out some $287 billion from the market's value on Monday.
That drop could have sharply cut into the 4.4 percent
average return made by Japan-focused equity mutual funds in 2010
and the 4.9 percent gain during the first two months of 2011,
data from Thomson Reuters Lipper showed.
The slump could have also hurt Japan-focused hedge funds,
which posted their best annual returns in five years last year,
rising 8.3 percent, data from fund tracker Eurekahedge showed.
Their return up to end-February in 2011 stood at 3.3 percent.
The nuclear crisis has worsened the outlook, some said.
"The Japanese economy is still fragile, so markets may take
all of this quite hard, at least until we have more clarity into
the true state of affairs inside the reactor," Kirby Daley,
senior strategist of Newedge's prime brokerage unit, which
provides services to hedge funds, said in Hong Kong.
While hedge funds could have theoretically survived the
slump better than long-only funds through hedging, a prime
broker said not many were hedged to the extent they would have
"Nobody would have ever known that the extent of the damage
was this huge," the Tokyo-based prime broker said.
However, one hedge fund manager likely to have benefited
from the slump in the Japanese stock market is Hugh Hendry,
partner at London-based Eclectica Asset Management.
Hendry said in January that he had gone short Japanese
industrials by buying credit default swaps on a basket of stocks
to guard against a slowdown in Chinese economic growth.
Eclectica declined to comment.
The damage caused by the earthquake is potentially greater
than the initial estimate on Friday and at worst, forecasts from
some economists suggest the world's third-largest economy is in
danger of slipping back into recession. [ID: nLDE72D0QZ]
Fund managers said it could have serious implications for
sectors such as tourism, semiconductors and chemicals in Japan
but a sharp drop also makes cheap Japanese shares a buy.
Even before Monday's drop, more than half of Japanese firms
traded below book value, while the MSCI Japan Index
traded at more than a 20 percent discount to
its 10-year median forward price-to-earnings ratio, a reason to
invest for value investors.
"The plunge in the Japanese market today could be the worst
following the quake. We're planning to add some shares at dips,"
said Jiang Yi-chien, manager of Prudential Financial's
Japan-Korea Fund in Taipei.
Also giving hope to investors is history.
A 6.8-magnitude earthquake in Kobe in Japan killed 6,400 in
January 1995 and erased 2 percent of Japan's gross domestic
product. Yet Japan's GDP for the whole of the first quarter of
1995 rose at an annualised rate of 3.4 percent.
"A few days into an initial market sell-off can often offer
good entry points at near-term lows," said Joshua Smith, a
senior product specialist at RCM Asia Pacific.
"Today, the Japanese market is under-owned and has become
the least expensive market measured, say, on a price-to-book
(Additional reporting by Antoni Slodkowski in TOKYO, Faith Hung
in TAIPEI and Sinead Cruise and Laurence Fletcher in LONDON;
Editing by Muralikumar Anantharaman)