Managers Say Japanese Sell-Off Is Overdone

A large group of successful fund managers says the sharp decline in Japanese equities over the past week is overdone.

In short, these managers say investors are confusing the tragic human cost of the disaster with the true long-term economic cost to Japanese companies. While short-term volatility is likely, the tragedy and global stock market sell-off off in recent days won't affect the long-term value of global equities, the managers say.

The MSCI Japan Index has declined 11.7% this month through March 16. Meanwhile the S&P 500 is down 5.2% and the MSCI EAFE is down 8.5% over the same period.

Ben Inker, of GMO-run Wells Fargo Advantage Asset Allocation EAAFX, wrote in a note to clients this morning that corporate Japan can bounce back.

"Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid 10 or more years in the future, we believe this event is unlikely to have material impact on the long-term fair value of corporate Japan," Inker wrote.

He thinks Japanese equities are one of the cheaper markets in the developed world, a view GMO colleague James Montier also made in a recent research report before the earthquake.

IVA managers Charles de Vaulx and Chuck de Lardemelle share this view. IVA Worldwide IVWAX had 13.8% of assets in Japanese companies as of Feb. 28 while International IVIOX had 28% of assets there. (Both funds are closed to new investors.)

"We do [think these are short-term losses], as we think indiscriminate selling is taking place to raise liquidity, thus unfairly punishing even the best businesses," DeVaulx wrote.