She's big on the Japanese rebound

Brenda Reed's on the fast track.

Seven years ago she graduated from the business school at Dartmouth College in Hanover, N.H., and joined Fidelity Investments as a stock analyst in Boston.

Today she's in Tokyo managing $550 million worth of stocks in Fidelity's Japan Fund.

Her investors are undoubtedly pleased.

Since Ms. Reed took over last Dec. 31, the total return on Fidelity Japan's shares this year has been 52.7 percent as of July 30. Over the past five years, though, the shares have risen barely 1 percent a year as Japan's recession dragged on and on.

Reed is a beneficiary of the sharp turnaround in Japan's stock prices in the last nine months. Nonetheless, her fund has decidedly beaten the average for stocks on the Tokyo Stock Exchange. The TOPIX, the index for that exchange, was up 34.4 percent at the end of July.

"She's done a really good job," says Dan Kobussen, an international-fund analyst at Morningstar Inc., a mutual-fund research firm in Chicago. "But it is very much a team effort."

Reed acknowledges that.

In a phone interview from Japan, Reed notes that by the end of the month, Fidelity will have 20 stock analysts in Tokyo.

Some analysts are Japanese, some Americans or other foreigners. They - and often Reed herself - meet frequently with executives from Japanese companies and sometimes troop through factories.

A female portfolio manager is rare in Japan. But that hasn't been a problem for her: "Most Japanese look at me and see me as a foreigner, not as a woman."

Reed uses recommendations by the analysts to pick stocks for her fund's portfolio. Fidelity Japan Fund includes mostly shares of major Japanese companies big in exports or serving primarily the domestic market.

But it also has stocks of smaller companies. The shares of many of these firms have done especially well with the hint of returning prosperity in the air.

Reed's fund has not, though, topped the returns of her colleague, Kenichi Mizushita, who manages Fidelity Japan Small Companies Fund. His fund's shares are up 119.3 percent this year as of July 30.

Morningstar lists 32 Japan funds. Their average return - boosted by several small-company funds - is about 55 percent so far this year.

Does investment in a Japan fund still have good prospects?

Mr. Kobussen says yes - "It is a good place to put a small proportion of your portfolio." It provides diversity. Japanese stock prices are less correlated with the price of US stocks than those of European companies.

Moreover, the Japanese economy is huge and showing signs of recovery after a gloomy decade.

"But there could be a lot of volatility in that market until there is more certainty of an economic recovery," Kobussen adds. "Don't put all your eggs in Japan."

Reed also sees "further room" for Japanese stocks to rise.

She doesn't expect the Japanese economy "to take off to the races." And Reed figures gross domestic product numbers for the second quarter will be less robust than those for the first quarter. Japan's unemployment rate reached a new high of 4.9 percent in June. And wage increases are at record lows too.

On the positive side, Reed notes that some Japanese companies are restructuring, thereby lowering costs. They are more focused on their return on assets. This is improving the "quality" of their earnings.

Moreover, the cash flow in relation to stock price of many Japanese firms is "significantly better" than the level for American companies on average.

Yet, Reed adds, Japan is coming off an economic trough, while the US may be near a peak.

Another potential bullish factor for Japanese stocks is that legislation will in six months or so allow Japanese companies to set up 401(k)-type plans for the first time. These tax-deferred pension plans brought a boom to the American mutual-fund industry, and Reed suspects something similar could happen in Japan.

"People will take more of the responsibility themselves for saving for retirement," she says. "A new market is coming up."

Reed has some favorite industries. These include telecommunications, where she expects "a wave of consolidation." She also likes technology stocks, such as software and Internet companies. There are relatively few of these in Japan.

"Japan has historically lagged behind the US in information technology," she says.

Some of the big traditional companies that have been shedding loss-making divisions and concentrating on core businesses tempt her investment dollars. She mentions Fujitsu and Toshiba as examples of restructuring conglomerates.

Reed says her Japanese friends see their nation as changing to deal with challenges from the globalizing economy.

Change "won't be really fast," she says. "But it's happening."

Brenda Reed's route to picking stocks

Targets mostly big Japanese companies, but throws some small firms into the mix.

Picks some companies that cater primarily to Japanese consumers.

Looks for firms that are strong exporters.

Favors telecommunication sector where she expects an increase in consolidation.

Likes technology stocks, such as software and Internet companies.

(c) Copyright 1999. The Christian Science Publishing Society