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A yen for Japan?

The departure of star fund manager David Mitchinson from Framlington could shake many of those banking on a Japanese revival in the investment market.

Mitchinson&#39s move to JP Morgan Fleming could be the biggest endorsement we have seen yet of renewed interest in Japan. Mitchinson is joining JPMF and will be based in Tokyo although he will not be running a UK retail fund.

The Framlington Japan fund has had great success under Mitchinson, who took the helm in February 2002. According to Standard & Poor&#39s, it has returned 124.3 per cent over just one year and is first out of 55 funds in its sector. Over two years, it has returned 64.8 per cent and is first out of 53 funds.

Given Framlington Japan&#39s performance over the last year the 28-year-old could be forgiven for a touch of stage fright. But it makes you wonder whether Bambos Hambi, manager of the Gartmore portfolio balanced strategy fund of funds, would have taken a new stake in the fund last week had he known about Mitchinson&#39s departure.

Framlington has attracted big name managers such as Nigel Thomas and George Luckraft but Chelsea Financial Services head of research Juliet Schooling believes the loss of Mitchinson will be a real blow.

“David&#39s shoes will be difficult to fill. Not only has he been number one in that sector but he has been way ahead of the second ranking fund,” says Schooling.

Framlington group sales and marketing director Nick Hodgson says: “We are disappointed and bemused by Mitchinson&#39s decision. We offered him an office, an assistant and the opportunity to launch a hedge fund in 2005 from Tokyo but he still decided to leave.”

Although Mitchinson will manage the fund until the end of July, a replacement has yet to be found. In the interim number two Jonathan Asante will manage the fund.

Hargreaves Lansdown senior analyst Meera Patel says there are three elements to running a successful Japan fund – skill, experience and resources. She says Framlington will now struggle to achieve a consistent performance as Asante&#39s main focus will remain with his baby – the emerging markets fund.

Investing in Japan is still a good opportunity. The global rally has seen the Japanese market grow steeply in the last year and Patel believes this will continue but predicts sustained improvement over three-year cycles.

Despite having a bear market for more than 10 years, many in the investment community are tipping Japan as the next big thing.

Legal & General fund manager Andrew Nagele, who is more of a large cap manager than Mitchinson, believes Japanese firms are refocusing on achieving profits for shareholders.

Nagele is so confident in Japan he has sold his home and moved into rented accommodation to invest more in his fund. Gartmore fund manager Gervais Williams has also remortgaged his house to invest in his fellow manager Nick Reid&#39s Gartmore Japan growth fund.

It will take more than grand gestures to convince those who have been burned by Japanese funds in the past. But analysts are convinced this is not another false dawn for the land of the rising sun.

IFAs such as Simpson&#39s Andrew Merricks say he is starting to look at Japanese funds for the first time in years. Merricks tips the Odey Japan, a newly launched fund managed by Alex Griffiths. He favours Crispin Odey&#39s investment style which is designed to provide absolute return from Japanese equities and is concerned with controlling absolute risk.

Merricks says: “If managers like Crispin Odey are interested, then I am prepared to listen.”

He is also interested in Scott McGlashan&#39s plan to launch the JO Hambro Capital Management Japan fund.

Less aggressive funds such as Neptune&#39s and Legg Mason&#39s are more interesting to Chelsea Financial Services at the moment. Interest is also spreading to multi-manager funds run by groups such as Credit Suisse, giving more risk-adverse investors limited exposure to Japanese growth.

Mitchinson focused on top-performing domestic companies rather than those dependent on exports, offering investors good exposure to this particular sector of the market, with only a small proportion of their investment.

The global recovery has boosted worldwide demand for Japanese exports such as digital goods, mobile phones and cars from manufacturers Toyota, Nissan and Honda.

Economists believe the Japanese economy is far less reliant on the fate of the US markets than other countries. Most of its exports – accounting for only 10 per cent of GDP – go straight to China.

Although this is a positive step for Japan, this trading relationship could turn against it in the future. China is rap-idly developing its own manufacturing industries and could overtake Japan in the future.

Small company profits are expected to rise by 25 per cent over the next year in Japan but analysts believe its real potential could lie in its private capital. If the Japanese can be persuaded to invest their yen in the stockmarket again, then the rally predicted could become a long period of sustained growth.

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