JAPAN. INVESTING THERE HAS BEEN HOT, COLD AND NOW.....

When Japan's bubble burst in the late 1980s and the Nikkei average declined roughly 67 percent, no one knew it would take 10 years before that market would start to turn around. But it has. Now, with hopefully the worst behind them, Japanese funds are beginning to show promise as the Nikkei average has rallied 30 percent over the past six months. As a result, through April 29, the average Japanese fund was up 23.72 percent. Over the past 52-week period, they've moved ahead nearly 31 percent, according to Lipper, Inc.

Todd Jacobson, a vice president at Warburg Pincus Funds (1-800-927-2874), is the associate portfolio manager on two Japanese funds with strong performance returns; the Warburg Pincus Japan Small Company Fund and the Warburg Pincus Growth Fund.

While both funds have relatively concentrated portfolios typically holding between 30 and 40 stocks, stocks selected for each are chosen using a fundamental bottom-up approach, the basic difference between the two funds is the market capitalization size of the companies selected.

"The management style for each is exactly the same," says Jacobson, co-manager on the funds for the past three years. "We don't break things down between small companies and big companies, we break things down in Japan between winners and losers. And that is the essence of our investment style."

Companies that Jacobson would call "winners" are those in which the managements have recognized the importance of corporate governance, shareholder value and are focused on higher returns. "Losers are the ones that just don't get it yet and are not focused on improving their returns," he says.

Sony is an example of a company held in the Warburg Pincus Growth Fund that Jacobson would call a "winner". Why? For a couple of reasons like they've announced a reduction in both labor force and factories, and, have decided to use stock to acquire three subsidiaries.

What's so important about those decisions are that they show that there's been a dramatic change in way Japanese companies are managed: Once a culture heavy on job security, now corporate management is making the decision to close factories and lay off people.

And until recently, companies weren't allowed to use their own stock to purchase things without severe tax consequences. "So nobody did it. But now that that law is being changed and Sony is effectively the first company to take advantage of that," Jacobson said.

Jacobson isn't the only one hot on Japan. David Linehan, a U.S. Trust senior vice president and Asia specialist, said that there's a dramatic change for the better that's beginning to occur in Japan. Although he is selective about buying Japanese stocks, he points out that the Japanese stock market indices have masked the performance of several strong companies.

But there is more to Japan's economic story and not all of the news is good news. For instance, Japan today now has a higher unemployment rate than the U.S. And then there is the economy---while it's great that there is corporate restructuring going on, prices are also falling.

"When prices are declining, the implication of that is that your sales are going down. So if your sales are going down and you're taking out costs, it's possible that you're only running in place and you're not going to see an increase in profits. So the caveat to all of this is, the economy has to stabilize, " says Jacobson.