A comparison of the returns of offshore Japanese equity funds with their Japan-domiciled counterparts over the 10 years to 1996 shows offshore funds outperforming onshore funds in dollar terms (see table).

This adds fuel to the debate about whether foreign investment groups (or teams with foreigners) have greater insights into the market than all-Japanese groups.

Even looking at one-year track records, it is interesting to note that among the 429 funds, the top 27 were offshore funds. These funds outperformed the top Japanese-domiciled fund by a factor equal to the depreciation of the yen over the period. From this we can surmise that much of their performance came from some type of strategy for hedging back into their base currencies.

This insight can be extended to make the following observation: It made sense for foreign investors to ride the yen's appreciation over the past decade. However, if one is persuaded of a gradual, long-term weakening of the yen, it may be advisable for investors wanting Japanese equity exposure to hire managers that actively hedge back into their home countries.

George Curuby is with Curuby & Co in Tokyo