Great Minds Don't Always Think Alike

There's no consensus among the leading foreign value hounds on the Japanese market.

The managers of  Oakmark International (OAKIX),  Columbia International Value , and  Longleaf Partners International (LLINX) rank among the best value-oriented foreign-stock skippers around, as do the managers of Harbor International (HAINX),  Tweedy, Browne Global Value (TBGVX), and  Thornburg International Value (TGVAX). They've all produced superior long-term returns, and they have won six of our Manager of the Year awards among them.

These six foreign large-cap managers are as dedicated to their own style of value investing as they are skilled. But they disagree about whether the exceptionally long-suffering Japanese market--which has posted a 2% annualized loss in U.S dollar terms over the past 20 years--is full of fetching bargains or is mined with value traps.

Sizable Japan Stakes
David Herro of Oakmark International is well aware of Japan's issues; in fact, he thinks Japanese companies should be valued lower because of their history of bad governance. But he believes some are very good buys at current prices, and he has been making selective but significant purchases in that market. He recently initiated a position in Sumitomo Mitsui Financial, and he has added to several existing positions, including top holding Daiwa. He says Daiwa's asset-management arm should benefit from the desire of Japanese savers to get better returns on mutual funds. In all, Oakmark International currently owns eight Japanese names and has a 17% stake in that market, compared with the 15% average for foreign large-cap funds.

Meanwhile, the managers of Columbia International Value, who pursue stocks that are trading well below their estimates of their intrinsic worth, have found many Japanese stocks that meet their standards in recent years. They bought NipponKoa Insurance and Astellas Pharma in the latter half of 2009, for example. Their fund now holds more than two dozen Japanese names and has more than one fourth of its assets invested in the country. Longleaf Partners International's Mason Hawkins and Staley Cates, who also focus on stocks selling at steep discounts to their intrinsic values, recently initiated a position in Seven Bank. That fund also has sizable stakes in a handful of other Japanese stocks, including longtime favorite NipponKoa (which they also own in domestic-focused  Longleaf Partners (LLPFX)). Overall, Longleaf Partners International has about 30% of its assets in Japan.

Limited Japan Exposure
Conversely, Hakan Castegren and the Northern Cross team that runs Harbor International have limited enthusiasm for Japan, though the fund does own  Honda (HMC), the robotics company Fanuc, and Japan Tobacco. The Northern Cross team thinks that Honda is the best auto company in the world and has the right product mix. It believes Fanuc is a global leader in the industrial space, and the firm has strong market positions as well as high margins. And it likes Japan Tobacco for company-specific and industry-specific reasons. (The fund also owns British American Tobacco and Imperial Tobacco.) But the Northern Cross team says that it has trouble coming to terms with the investment cases for financial, electronics, and conglomerates/trading companies in Japan and that it simply has had a tough time finding many stocks that meet its qualitative criteria there. Thus, while the team has many names in the land of the rising sun on its watch list--and is well aware of the risk of being light on that market--Harbor International owns only these three names in Japan and has just 5% of its assets there.

The Tweedy, Browne skippers, who favor stocks that are cheaper than the private market values they assign them, do own a significant number of Japanese issues. But most of those holdings are quite small. As a result, their fund had just 6% of its assets in Japan. Similarly, Bill Fries, Wendy Trevisani, and Lei Wang of Thornburg International Value have a decent-size position in the construction and mining equipment maker Komatsu, which they expect to benefit from infrastructure spending in China, India, and other emerging markets, and they own a few other Japanese stocks, but overall just 8% of their fund's assets are in Japan.

Conclusion
It makes sense that these talented foreign bargain hunters have built very different Japan weightings. Even managers who employ identical strategies often reach different conclusions on individual stocks, and though these six skippers all employ value-oriented approaches, their styles do differ in significant respects. (Herro is a deep-value investor through and through, for example, whereas Castegren and his Northern Cross colleagues are blue-chip value investors at heart.) And the companies in Japan vary widely in terms of the quality of their fundamentals, operations, and management--and the economy there has a number of deep-rooted and serious issues--so it's a logical place for fund managers to have disparate views on the overall opportunity set. Foreign-stock managers, in fact, have been disagreeing on the attractiveness of the Japanese market for years.