I met with State Street Global Advisors (Japan) in their beautiful offices on the 25th floor of Toranomon Hills Mori Tower. The business is very impressive with 60 employees and $120 billion in assets. They manage three portfolios for the GPIF—the Government Investment Pension Fund of Japan. GPIF is the world’s largest fund, with $1.2 trillion in assets. Recent changes in the asset allocation of GPIF came up in several meetings—more to follow…
Here are a few observations from the meeting, with my commentary generously added:
There is talk about increased interest in Smart Beta products (low volatility, value mix, & quality mix) among all types of Japanese investors. This was also mentioned in multiple meetings. This correlates with dramatic changes occurring in corporate governance in Japan.
ETFs are still in the infancy in Japan, but the future looks very bright. There are fewer than 200 ETFs listed on Tokyo Stock Exchange. The most popular ETFs are leveraged ETFs! Leveraged ETFs are offered by some of the local Japanese providers, and they have attracted enormous trading volume. State Street currently offers three ETFs in Japan, none of which are leveraged ETFs. (The three ETFs are the S&P 500, Gold, and a Pan-Asia Fixed Income ETF). They are optimistic that long-term asset allocators and institutional investors will continue to adopt the use of both core and smart beta ETFs.
Abenomics is credited with changing the mindset of individual and institutional investors. This seems to be spurring enthusiasm towards the 2X leveraged ETFs. The Bank of Japan is buying ETFs, and investors want to be on the same side as the Bank of Japan.
Historically, brokers have had a very large impact on the activity of the individual Japanese investor. Their brokers were compensated for selling products (loads/charges) and for making trades (commissions). Regulators have frowned on all of the short-term trading directed by retail brokers. This is encouraging a business model change with a greater focus on fee only advisors. This will ultimately result in greater use of ETFs, given their low cost and efficiency.
Japanese citizens are renowned for their high savings rate. They have saved approximately $15 trillion at Japanese financial institutions. Government policy is trying to shift some of these savings into the market, and even an incremental shift will make an impact.
The general consensus is that the trend of a weakening Yen will continue, and a weak Yen is good for Japanese equities. The Bank of Japan is fully expected to maintain its current accommodative monetary policy.
The discussion came back to Prime Minister Abe. Financial markets have changed since his election in December of 2012. This group was very positive about Abe, especially on his focus of monetary easing and liquidity. They pointed out that Prime Ministers used to rely on their Finance Ministers to interact with the market. Prime Minister Abe is different—he speaks directly to the market, and he has inspired confidence among investors. In particular, Abe went directly at the Bank of Japan. The prior regime was essentially fired, and the appointment of Governor Kuroda has changed everything. They referred to it as the “Kuroda Bazooka,” and pointed out that his policies have been very smart.
In summary, there was a clear sentiment that things are changing for the better in the Japanese economy and financial markets. Changes led by Prime Minister Abe and Bank of Japan Governor Kuroda ranging from QE, corporate governance, and changes in the GPIF asset allocation are all viewed as positive for investors.
Special thanks to Brennan Staheli, Joe Dunbar, and the Lunt Capital team for their contributions to this report.