With Japanese stock prices reaching a 33-year high, the economy emerging from deflation, and the positive impact of corporate governance reforms over the past decade, it’s not surprising that money managers, especially foreign investors, who previously showed little interest in Japan are now flocking to Tokyo. The global uncertainty in China further adds to the appeal of the Japanese market.

Rene Aninao, founder and managing partner of Corbu LLC, believes that the current geopolitical environment is causing capital outflows from China, with Japanese equities expected to mostly benefit among the Asian countries. US and European investors are increasingly recognising the risk premium associated with the Chinese market, driven by ESG concerns and geopolitical risks. Consequently, there is a growing trend of global asset managers seeking exposure to Asia without investing in China.

“The question is do global asset managers still want to have exposures to Asia without directly exposed to China or directly investing in China. The answer is yes,” Aninao told Top1000fund.com in an interview in the sidebars of the 17th Global Fiduciary Symposium on November 15, 2023. He continued that Japan and South Korea will emerge as preferred investment destination due to their larger, more sophisticated markets compared to other Asian countries such as Malaysia, Indonesia, the Philippines, or Vietnam.

Aminao went on, saying, “The political regimes in these four countries aren’t stable and there isn’t enough market capitalisation to accommodate and absorb all of the scale of capital that may come out from China. So, that’s why Japan is the beneficiary.”

The trade war between the US and China, the pandemic, Russia’s invasion of Ukraine, political tensions between China and Taiwan, and the recent escalating conflict between Israel and Hamas have reshaped the world into competing geopolitical blocs, Aminao said. This re-regionalisation has compelled a change in the policy frameworks employed by the U.S.-NATO and its allies. While these developments have heightened investor risk aversion, the re-regionalisation has given rise to a substantial global capital expenditure cycle — specifically, digital industrialisation — creating numerous emerging investment opportunities,

Aninao highlighted Warren Buffett’s increased exposure to Japanese equities in recent years. “So that’s the same, Buffett has been selling TSMC in Taiwan,” he said. “Buffett is concerned about contingencies in the straits—which is true. So, he needs to invest that money in Japanese brokerages and trading houses. I anticipate more of this trend. Particularly in the West, where there’s a pursuit of returns, the Nikkei’s increase is only going to drive more capital flows.”

Foreign Buying

Jiro Nakano, the general manager of Japan sales planning and management at Nikko Asset Management, has observed a transformation in the Japanese stock market since the beginning of the year. The Nikkei stock average has surged by about 30 per cent, reaching a 33-year high of 33,000, with crucial support from foreign investors, marking the strongest foreign investor activity in 14 years.

Japanese equities are becoming an increasingly attractive investment destination for overseas investors as they are growing cautious about investing in US equities as the US interest rates rise and China becomes less attractive amid concerns about the country’s real estate market, Nakano said in a keynote speech at the symposium on November 15.

“While some may view the current market upturn as temporary, I have a different perception,” he said. “The market is currently experiencing a major shift in the Japanese stock market, and we believe that the magma is on the verge of exploding.”

Nakano echoed Aninao, saying that Buffett’s entry into the Japanese stock market in August of 2020 serves as a symbolic indicator of this shift. Attracted by low valuations in domestic trading companies, Buffet invested heavily in the sector. Since then, stocks of trading companies have experienced remarkable surges, doubling or tripling in value. Buffett’s success in Japanese stocks raises questions about his expectations for the market’s growth over the next decade.

Nakano said that factors contributing to Japan’s market appeal include the anticipation of renewed growth driven by inflation and wage hikes, the continued undervaluation of Japanese stocks, and the robust financial position of Japanese corporations. These elements combine to create an environment that global investors to consider Japan as a lucrative investment destination.

CalSTRS has saved more than $1.6 billion in costs since 2017 thanks to its collaborative model approach, which brings more assets in-house and encourages the use of different investment vehicles, including co-investment, joint ventures, SMAs, direct ownership and revenue share. Now, as it sets its targets for the next five years, it’s looking to measure the other benefits of the program, including boosted returns and more control over risks.

As institutional investors around the world invest in more private assets, facing liquidity risks and resourcing pressures, they are often looking at how to evolve and adapt into a more direct-investing model. For CalSTRS, the $304 billion fund for Californian teachers, the evolution into private markets took on a slightly different approach through a collaborative model that focuses on partnerships and innovative structures.

Since the fund moved into this model five years ago, it has achieved average annual savings of $273.5 million and has now set an internal target of an additional estimated $200 to $300 million a year of savings over the next five years.

In an interview with Top1000funds.com from his Sacramento office, deputy chief investment officer Scott Chan says the fund will also consider measuring more directly the other benefits of increased returns and control over risks.

The collaborative model includes more internally managed assets, with 62 per cent of the portfolio now managed internally. But as the fund moves more into private assets, the collaborative model focuses not just on internal management but how CalSTRS can partner with external providers in innovative ways to achieve similar benefits.

“As we shifted more into private assets we didn’t think we could build an ‘internal Blackstone’, so we decided to build a model to leverage our partners,” Chan says. “We desire to be the partner of choice, and that is not just a term of hubris, but a term for our partners to know we want to develop a relationship with them. It’s reciprocal.”

Chan says this means the team at CalSTRS is very active in its work with fund manager partners, aiming to be nimble, responsible and knowledgeable.

“We want to be trusted experts and be nimble. For example, if they have a co-investment request we want to come back in the same day,” he says.

The model includes a whole toolkit of flexible structures including SMAs, comingled funds, co-investment, joint ventures with managers and peers, minority or majority interests and full ownership.

In the first year the fund participated in 106 collaborative model transactions, and in the past year that has grown to 371 including 309 collaborative private structures, 60 internally managed funds and two rebate agreements, resulting in $428 million of savings in 2022 alone (growing from $134 million in savings in the first year of the model).

While Chan says the cost savings “get the headlines” what is less talked about are the benefits to returns and managing risks.

“We have to look holistically. We are net-return investors and are trying to create value in the costs savings and returns through innovative structures,” he says.

“The evolution is we will do more SMAs and co-investment, but we will also do joint ventures, revenue shares, minority shares and outright ownership, in an order that looks like a pyramid. They all have resourcing needs that are sophisticated at the top of the pyramid. When you own an asset manager you need two staff full-time to manage that organisation strategically. The goal of that would be adding 3 to 7 per cent to the IRR, which is significant.”

According to Chan the collaborative model has been a contributor to net value added, with alpha-above-benchmark over three years of 97 basis points, five-year alpha of 67 basis points and 29 basis points over 10 years.

He says it is also contributing to a fuller understanding of risk.

“It is helping to move the dial on risk because as we get to know and partner with managers on the ground floor, our PMs end up understanding the risks a lot better,” he says.

“Out of that we want to own this risk long-term and sell that risk to the market. We want to inherently know what to retain and sell. For an investor with 43 per cent in private assets it is important to manage the risks.”

Execution risk

A direct result of the collaborative model is that CalSTRS internally is taking on more execution risk, which has a direct implications for the size and quality of the team.

“We are taking on more execution risk and that falls on having more staff and more resources but also more sophisticated resources to be able to manage those risks and mitigate them. The good news about execution risk is you can mitigate it, versus market risk where you’re just taking the beta.”

In its 2021-22 five-year plan the fund outlined 91 new hires and has developed a plan to hire more staff to manage and mitigate the execution risk and to train and equip the current staff. The CalSTRS investment team currently numbers 231.

“We need people who have more of a background to suit those types of investments,” Chan says.

“We are powering up the co-investment unit and recently hired an ex-VP from KKR, and a PM from ADIA.

“All the credit goes to the team; they have executed this excellently. We have a great team and culture, they feel empowered and have delegation up and down the chain. We have a streamlined decision-making process and they can be nimble in the marketplace.”

Next phase: Evolving structures

The first phase of the collaborative model was to get every division and team executing collaborative model deals in their own way.

Five years ago about 2.5 per cent of the private equity book was co-invested, now it’s about 25 per cent with a new target of 35 per cent.

Other asset classes take on a different look. In real estate about 80 per cent of the portfolio is in joint ventures with managers, and CalSTRS also owns majority interests in a few real estate operating companies, in what is a more strategic move.

“Each of our partners is unique and the transactions are unique, so we go to the partners and say let’s be innovative, they have the canvas,” Chan says.

A lot of the opportunities in the fund’s sustainable investment portfolio were falling between asset classes, so a collaborative model was adopted from the outset.

“Now, because we have expertise across the whole organisation, we can execute a collaborative model straight away,” Chan says.

“We have a partnership with Just Climate, which is part of Generation, where we co-invest and have a strategic stake in the business. The exciting thing is we have the expertise to do any of these structures and can map it to new endeavours that we see coming up.”

Private credit is another area the fund is looking at strategically. It recently made a 2 per cent strategic allocation and it’s approaching the investments innovatively.

“Private credit is where we want to drive a lot of co-investment and as the industry grows we can take some shots at owning and growing with these organisations,” Chan says. “Where we have taken an ownership stake or revenue share is in areas where we want to grow together with the organisation, be strategic and on the ground. We think private credit will continue to grow and an area we want to grow with a select number of groups and we’ve done some revenue shares, owning the managers.”

Chan says as the fund moves into the next phase of the collaborative model it will move more into joint ventures and revenue share and ownership.

“Doing co-investment is something we can do well and at scale, joint ventures, revenue share or ownership takes more time and we can get more efficient and be more prolific. As we evolve we will likely be evolving from SMAs and co-investment to be doing more revenue share and minority and majority ownership. It will look like a pyramid. It’s got be strategic for us to have that stake, we won’t do it very often but it’s an area we are growing into.”

三井住友銀行の企業年金基金は、インフラ投資やプライベート・エクイティ（ＰＥ）などオルタナティブ投資を増加させる運用方針を示した。流動性は低いものの、リターン（収益率）の最大化を追求する。日本国債は過去10年以上、低水準に抑えてきたが、日銀の政策修正を受けて今後、金利上昇が予想されるため、運用戦略の見直しを検討する可能性がある。

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Japan’s Sumitomo Mitsui Banking Corporation (SMBC) Pension Fund, managing assets worth 1 trillion yen ($6.6 billion), is poised to increase investments in illiquid alternatives, including infrastructure private equity and debt aimed at maximizing returns.

Anticipating a shift in domestic interest rates with the expected exit of the Bank of Japan (BOJ) from its ultra-easy monetary policy, the pension fund is considering reassessing its longstanding strategy of investing Japanese government bonds (JGBs), which has comprised only about 1 per cent of its portfolio for more than a decade.

Hirokazu Note, chief investment officer at SMBC, said at the 17th Global Fiduciary Symposium in Tokyo on November 14, that his investment strategy has remained consistent since his appointment in 2013, driven by his commitment to enhancing returns through measured risk-taking.

In 2012, during the implementation of the so-called “Abenomics”, he significantly shifted towards equities while slashing holdings of JGBs.

“JGB holdings were reduced to about 11 billion yen of the entire portfolio of 1 trillion yen and that level hasn’t changed since then,” said Note.

However, he may consider reviewing this strategy in light of the prospective increase in domestic interest rates.

The pension fund holds a total of about 500 billion yen in domestic and foreign equities and also has kept its foreign assets unhedged. Note emphasized the fund’s long-term investment approach and the importance of not altering strategies based on short-term performance.

Liquidity, particularly short-term liquidity to meet obligations during a market crisis, remains crucial to the fund’s strategy. The fund holds three years of benefits in cash or equivalent in the general account.

SMBC Pension Fund classifies alternative assets as private equity, private debt, infrastructure and real estate, as illiquid assets. Note revealed plans to increase their allocation to 40 per cent from the current 30 percent. Additionally, it holds 13.5 percent in hedge funds, which it treats as a medium liquidity asset.

Expressing enthusiasm for investing in domestic venture capital, he stressed the fund’s mission to support these ventures.

“We are seeking to invest in venture capital of corporations or universities as we believe this is our mission. Although there is a risk for ventures to fail, we strongly believe they could lead to future national strength.

国内企業年金基金の多くは政府の「アセットオーナー改革」方針に対して今のところ静観の構えを示している。年末までに策定予定の政策計画を見極める姿勢だが、業務負担が増すとの懸念があるほか、支持率が低下する岸田文雄政権のリーダーシップに不安があると冷ややかな声も出ている。

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Geeta Kapadia, CIO of Fordham University’s $1 billion endowment is rolling out a suite of changes that include paring back the fund’s 50 or so manager relationships, introducing new passive allocations, testing the water on internal management in fixed income and preparing the ground for an inaugural sustainability strategy.

“My general preference is for a smaller, concentrated portfolio,” says Kapadia in an interview with Top1000funds.com from the New York university endowment’s Bronx headquarters. In some cases, she might swap managers by replacing incumbents with those who are a better fit and creating some multiple partnerships. But in other corners of the portfolio, she is considering removing the mandate altogether.

“We have more managers than we need and instead of adding value they are detracting, costing us money, and in some cases, providing only benchmark performance. Every portfolio could lose a manager; my overall objective is to reduce the total number of managers.”

Kapadia has recruited a new, five-strong team (comprising two new hires and two internal promotions) to oversee the traditional, growth-focused portfolio where the largest allocations include absolute return hedge funds (15 per cent of AUM), public and private equity and a smaller allocation to private credit. A year and a half since taking the helm, she is about to put her vision into action.

That begins with the introduction of new passive mandates. Until now the whole portfolio has been actively managed but from year-end new passive managers in equity and fixed income will come in. “We are hoping to implement decent-sized passive allocations by year-end,” she says. “I don’t think looking for long-only US equity managers that outperform is a great use of our time. I’d rather take active risk in private markets than in public equities or credit.”

In a further break with the past she is also considering insourcing passive fixed income. “At my previous firm, we successfully managed a passive fixed income allocation in house. Building off that expertise, we may consider implementing a similar portfolio at Fordham.”

The team continue to scrutinize manager relationships across the portfolio where she says it’s been a good time to re-evaluate the strength of private equity partnerships to make positive changes – despite the slower fund-raising environment, managers are coming back to re-up. “We are evaluating our existing private equity managers’ funds while continuing to develop relationships with new managers,” she says.

She tends to favour small, niche GPs including new managers coming to market with their second or third fund that are looking to partner with institutions focused on growth and long-term relationships. Typical questions focus on managers’ intentionality and decision-making processes, firm ownership and fees, in the types of conversations that are much easier with smaller managers.

She also wants managers to provide analysis on how inflation is impacting founders and their decision to come to market; she expects insights on portfolio companies’ ability to hire, put money into the business or other factors that could support operations and ultimately outperformance.

In the main, Fordham tends to invest in private equity funds below the $5 billion mark and typically writes cheques of between $10-30 million – although she caveats that does depend on the opportunity and if there is overlap with the venture allocation. “We particularly like private equity focused on healthcare and education tech, and investments that are addressing challenges faced by underserved communities.”

Although she notes partnering with smaller and emerging managers gives Fordham the ability to influence fee negotiations, she is mindful that small GPs depend on fees to grow their teams and infrastructure, and she won’t push too far. “In contrast to the larger GPs, they typically need the fees more,” she says. “Our more challenging conversations about fees tends to be more with the bigger managers that have more room to negotiate.”

Fordham’s hedge fund managers are undergoing the same scrutiny.

She doesn’t invest in quantitative systematic funds as a rule, and her primary focus is meeting hedge fund portfolio managers in-person. Here she talks through the strategy, ensures it aligns with what the manger says; that the strategy is given time to demonstrate its value and that she understands any underperformance.

“We need to get to know the managers and understand what they are doing, ensuring there isn’t an overlap between strategies, and that each portfolio is positioned to take advantage of the current environment.” She adds her knowledge of the names (mostly small and niche and focused on one or two strategies) is deeper than in private equity given she’s overseen relationships with many hedge fund firms in previous roles.

The hedge fund portfolio is mainly tasked with dampening the downside and providing uncorrelated returns. “Over the last fiscal year, the book did what we hoped and diversified away from low returning equity markets.”

Any changes to the manager roster will be on the margins, however she is focused on ensuring there isn’t an over reliance on long short managers and that she is not over-playing the US bias. “I really want to ensure we don’t just have a collection of long/short managers as a default. If I am going to add anything in this space, it will likely be non-US, but generally we have a strong portfolio already in place.”

In another change of tact, Kapadia is also mulling the introduction of more income producing assets. This is unlikely to be traditional fixed income that clips coupons, but she does want to see what investments exist that are long-term, provide regular income, and can contribute to funding Fordham’s 4.5 per cent annual spend that is wholly dependent on investment revenues and donations.

“To ensure we don’t have to sell investments to fund our liquidity needs, we think three to four quarters ahead regarding our spend.” She says Fordham’s return target looks to fund the spend and add a couple of percentage points above that.

Going forward she is also keen to do more to integrate sustainability. The endowment already has direct exposure to sustainability funds, but she wants “to do better” and is mulling a strategy that could begin with divestment.

“When it comes to ESG, we believe we may be behind our peers,” she says. A new leadership team at the top of the university; a new investment committee, her own new team and consultant, plus growing engagement from Fordham’s student community is shifting the scales. “We will increasingly spend time thinking what exposure we must companies we are not excited about, and what a potential ESG policy might look like. We want to demonstrate tangible change and need to decide as an institution what we want to achieve and how achievable those objectives are.”