What are we looking for?
Asia Pacific equity funds with the highest and lowest exposure to Japan. Let's see how these investments have fared in the wake of a massive earthquake and ensuing nuclear crisis. Japan's Nikkei 225 index fell 10 per cent between March 11 and March 24.
The screen
We ranked Asia Pacific equity funds by weightings in Japan, and checked the month-to-date returns to March 24. U.S. dollar, segregated and duplicate versions of the funds were excluded.
What did we find?
Vast differences in Japanese investments - differences that can stem largely from a market benchmark that a manager needs to beat.
CI Pacific, which had a 62-per-cent exposure to Japan and lost the most money from March 1 to 24, shed 5.1 per cent. Dynamic Far East Value, which had 3 per cent invested in that country, was up nearly 1 per cent.
The CI fund is focused on the five developed Asian countries in its benchmark, the MSCI Pacific index. Japan's weight in that index was around 65 per cent in February. High Japan exposure helped during the market crash in 2008 when the fund lost only 24.2 per cent that year versus some peers, which shed more than 40 per cent.
But the fund's strategy and benchmark are now under review, and the allocation to Japan will fall in the coming months, according to CI Investments Inc. Fund manager William Priest's outlook on Japan is getting grimmer. "We continue to be concerned that the country's severe structural issues - falling population, shrinking labour force and rising government debt to GDP (the highest in the world) - have no evident solution," he said in an e-mail. "The reconstruction needs will only add to the debt burden facing the country."
On the other hand, Dynamic Far East Value is benchmarked against the MSCI All Country Pacific index of 12 developed and emerging countries. The biggest country weighting recently was 31 per cent in China.
Manager Chuk Wong said his general lack of interest in Japan comes from his value-oriented stock-picking process. When the market tumbled he bought more shares in two of his Japanese holdings, Itochu Corp. and Tokyo Electron Ltd. "During the first two days, the market lost 16 per cent and I saw value emerging," he said. "But the market has come up a lot since."