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TOP-PERFORMER LISTS CAN BE MISLEADING

Financial reporters mean well, but they often mislead investors down unprofitable paths. One way this happens is the reproduction of top performers lists. Some publications list top performers on a year-to-date basis, while others take a shorter view.

Unfortunately, many investors blindly use these "hot" lists as an investment strategy, picking funds that have done well over a short period of time. The most recent example of this short of system generating bad advice is funds that invest in Japan.If you look at the price charts of Japan funds, an investor might be tempted to allocate some money. Superficially, the conditions for a trend reversal appear to be in place. The Japan fund average has broken a long downtrend, formed a double bottom and subsequently rallied from there.

Since March 23 of this year, the average Japan fund has gained close to 10 percent. Over the same time, the S&P 500 has only gained 1.5 percent. Japan looks good, right? I don't think so.

IT ISN'T PRETTY. Consider the following obstacles facing the Japanese stock market:

1. The cult crazies are terrorizing the Japanese citizenry. Crippling Japan's mass transportation system is sure to devastate Japanese business.

2. The latest round of trade talks have broken down, and the possibility of trade restrictions/tariffs is very real. A net exporter like Japan can ill afford trade sanctions from a huge customer like the United States.

3. Have you forgotten about the Kobe earthquake? Kobe is among Japan's manufacturing and transportation centers. The damage will take years to undo and the long-term effects of the earthquake are still to be determined.

4. The strong yen is a terrible blow to Japanese exporters. Japan has long has a trade surplus with the United States, but the weak dollar threatens to make their products too expensive in the United States.

5. A stubbornly weak Japanese economy that cannot generate any real GDP growth. Many economists believe Japan is still in the midst of a recession and anything other than inconsequential growth is out of the question.

6. Crumbling real estate prices in Japan have weakened the condition of many of Japan's most respected financial institutions. Many companies still carry real estate on their books at acquisition price, unreflective of the huge losses.

7. The Japanese Nikkei average has been in a downtrend and tells a different picture than Japanese stock funds. During the month of March, the average Japan fund gained close to 2 percent. During the same time, the Nikkei lost more than 7 percent.

WHAT'S WRONG WITH THIS PICTURE? Wait a minute, didn't I say earlier that the average Japan fund was up almost 10 percent in the past month? I did, but what you need to factor in is the effects of currency translation. While the Japanese stock market was losing ground, the Japanese yen was gaining ground at a faster pace.

With the U.S. dollar reaching post-WW II levels, yen denominated investments (like Japanese stock funds) were making a killing. The result is that Japan funds gathered value even though their underlying stocks were losing value.

If not for the weak dollar, Japanese fund investors would have gotten killed. Year-to-date, the Nikkei average is down almost 14 percent.

DON'T INVEST IN JAPAN. The outlook in Japan isn't the rosy picture that recent performance charts suggest. I do not see any evidence that Japan has solved its structural financial problems and the weak dollar is a major negative that may ultimately killing its golden export goose.

Everyone is always looking for a turnaround situation and searching for the next "bottom." In my opinion, the Japanese stock market is still in a downtrend without any economic catalysts that would signal a trend reversal.

Anyone who invests in or owns Japan funds today better hope for a very weak U.S. dollar - that's the only thing that is preventing a widescale Japanese bear market.

*****

ADDITIONAL INFORMATION

How funds swung

% From Trailing

Fund Name Mar. 95 12 Mos.

Scudder Japan 12.5 -12.4

T.Rowe Price Jpn 11.6 -3.3

Fidelity Japan 10.3 -2.6

Wright Japan 9.6 -0.3

Source: Donoghue OnLine, 1-800-982-2455