Japan’s investment fund for teachers has switched its focus to avoiding losses, predicting the best days are over for both stocks and bonds.
The Teachers’ Mutual Aid Cooperative Society is bracing for an end to a bull market that propelled stocks to an 18-year high and pushed bond yields to a record low, Toru Higuchi, a general manager in the asset management department in Tokyo, said in an Aug. 3 interview. The fund, which oversaw about ¥780 billion as of March, has no plans to significantly adjust the about ¥150 billion invested in risk assets like stocks, currencies and hedge funds.
The assets it bought surged in value in the two years to fiscal 2014 as Prime Minister Shinzo Abe’s unprecedented stimulus policies boosted markets and weakened the yen. Japan’s 10-year yield at 0.4 percent has almost halved since Abe took office in December 2012, while the Topix more than doubled.
“The market environment has been very favorable overall under Abenomics the past couple of years,” Higuchi said. “Good times are likely coming to an end. We face a real test from next fiscal year to minimize erosion in portfolio gains as asset prices could gradually start to slip from the highs.”
Since Abe began his tenure, the yen has depreciated more than 30 percent against the dollar and the yield on Japan’s 10-year government bond touched a record low of 0.195 percent. The Tokyo Stock Exchange REIT Index, which the fund began investing in fiscal 2013, has gained about 60 percent.
A potential increase in interest rates by the Federal Reserve, plus a slowdown in China’s economy, may cause those markets to change direction, Higuchi said. The Bank of Japan’s effort to reach a 2 percent inflation target may pose an additional problem for real estate investment trusts, he said.
“The way J-REITs soared far more than growth in property values suggests their premiums are high and so are the risks of these premiums evaporating rather quickly,” Higuchi said.
The funds’ so-called risk assets cover 10 classes managed under four categories: growth, yield, inflation and income. Growth covers stocks, while yield includes developed market bonds. Inflation embraces commodity-related debt and equities, plus global REITs. Income consists of high-dividend Japanese shares, J-REITs and hedge funds.
Institutions with solid finances can afford to take on risks, said Yusuke Ikawa, a UBS Group AG strategist in Tokyo.
“Good financial health offers a buffer to take more risks,” he said. “Taking risks can help stabilize markets, something the government is hoping for.”
Fifty-two percent of the teachers’ fund was in government and corporate bonds in the fiscal year ended March, 11 percent in foreign debt, 4.2 percent in overseas stocks and 3.8 percent in Japanese equities. The rest was in cash and general accounts of life insurers, according to the fund’s website.
Unrealized gains from overall assets rose to ¥26.6 billion in the fiscal year to March 2015, from ¥9 billion in the year ended March 2013, according to the fund. The 527,992-member fund established in 1965 offers teachers insurance coverage including medical, automobile and fire.
“We made changes while returns were good to respond to any economic cycle and produce stable returns,” Higuchi said. “Valuation gains are growing steadily even when our portfolio focuses on capping risks. That allows some leeway to step-up risk controls further.”
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