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By Bridget B. Hughes, CFA | 06-13-2013 12:00 PM

De Vaulx: There's Still Value in Japan

After a nasty 25-year bear market, Japan is still far cheaper than both U.S. and European equities, despite its huge rally, says IVA CIO and portfolio manager Charles de Vaulx.

Bridget Hughes: Hi, I'm Bridget Hughes, one of the analysts here at Morningstar, and I'm at the Morningstar Investment Conference. I'm here today with Charles de Vaulx, who joined us for our International Opportunities panel.

Thank you, Charles, for joining us.

Charles de Vaulx: You're welcome.

Hughes: I wanted to start by asking you about Japan, because you're one of the few international global investors that actually has had a meaningful commitment to Japanese stocks, and has had so for a long time.

It's one of the best-performing markets this year. How do you feel about the story in Japan? And then, how do your stocks kind of fit into that story, or are they distinct from it?

De Vaulx: You're right. We had a pretty high allocation to Japan over the past few years. We have taken advantage of this huge rally that started mid-November last year to trim some positions. In fact, we're down to around 8% in Japan in our worldwide fund, down to around 16% only in our pure international fund.

But because the severe correction has taken place over the past three weeks--I think the market is down 20%-22% over the past few weeks--over the past few days now we've become net buyers again in Japan. So, at the right price we would be happy to own more in Japan as opposed to keep trimming.

What truly intrigues us with Japan is not so much Abenomics, the new policies, the desire to inflate your way to devalue. What really piques our curiosity is the fact that we think corporate Japan has finally changed in terms of capital allocation. They used to hoard cash. Now we've seen more and more companies in Japan willing to raise the dividends, more and more companies willing to buy back their own stocks, when they feel the stock is undervalued, and we're even seeing some corporate activity, friendly mergers or maybe not-so-friendly things.

Recently an American investor, Dan Loeb, took a stake in Sony, suggesting some radical changes, and interestingly enough, the company seems receptive. So, I think better capital allocation going forward for Japan is what piques our curiosity. Also, from a valuation standpoint, despite the huge rally, Japan after a 25-year nasty bear market is still far, far cheaper than both U.S. and European equities.

Hughes: So, whereas Japan has been one of the better-performing markets this year, and the U.S. has been strong as well, Europe has not been as strong. So, are you finding opportunities in Europe?

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