Japan’s biggest quarterly rally in 25 years did little to entice institutional investors, whose stock holdings fell to the lowest proportion of overall holdings ever in March.
The country’s insurers, lenders and trust banks pared their Japanese shares to 28 percent of total market value, the lowest ever, as of March 31, according to Japan Exchange Group Inc. Holdings have fallen from a peak of 44.1 percent in 1988. Fukoku Mutual Life Insurance Co. and Sompo Japan Nipponkoa Asset Management Co. are betting Prime Minister Shinzo Abe’s policies will fail to defeat deflation or restore sustainable growth.
The Bank of Japan is doubling the monetary base and Abe has pledged public spending, tax reform and freer markets to kickstart the economy and encourage investment after 15 years of deflation made it profitable to hoard cash. Institutions have been net sellers of shares every week since mid-November, unloading 6.2 trillion yen ($63.4 billion) through June 21, according to data compiled by Bloomberg.
“Almost no Japanese investors believe the real economy will get that much better,” said Ichiro Yamada, who helps manage about $3 billion in stocks at Fukoku Mutual Life in Tokyo. “Past governments have failed to fix the economy, so nobody’s holding out much hope this time. It’s very hard to alter portfolios based on expectations for Abenomics.”
The Topix index jumped 20 percent from January through March, the most for any quarter since 1988, after advancing 17 percent the previous three months. It’s up 6.2 percent since the end of March, trimming a gain of as much as 23 percent.
Japan’s institutional fund managers missed a chance to generate returns for their clients when they reduced holdings during the biggest rally in a quarter century, said Mitsushige Akino, who oversees the equivalent of about $500 million in Tokyo at Ichiyoshi Investment Management Co.
“The problem is they don’t have much incentive to pursue higher returns while they have many reasons to avoid risk,” Akino said. “They don’t believe Abenomics will change the long-term direction of Japanese equity markets. They still believe stocks will continue to go down.”
Institutions’ share of stock transactions fell to 4.7 percent last month, the lowest since the first week of 2008. Individual investors are filling the void, accounting for more than 40 percent of daily volume and helping to make Japan the most volatile developed market.
The BOJ’s unprecedented monetary easing, announced in April, was expected to drive a shift from government bonds to local assets. Instead, institutions such as Bank of Yokohama Ltd., Japan’s second-largest regional lender, are opting to buy foreign bonds as they sell local shares.
“Even though the BOJ set a 2 percent inflation target, institutional investors don’t think it will happen, so they’re not changing their weightings and have to sell stocks when the markets rise,” said Goya Nakao, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co., which oversees about 5 trillion yen.
Japan’s Government Pension Investment Fund, the world’s biggest manager of retirement savings, is among investors who doubt the central bank can reach its goal of 2 percent inflation within two years, President Takahiro Mitani said in an interview June 21. The fund announced new asset allocations on June 7 that are in line with its portfolio as of Dec. 31.
“Our new core portfolio is very close to our actual allocation right now, so we were saved,” Mitani said. “If the new portfolio had been really different from what we have, then we’d have to think about how to change allocations with minimal impact to the market.”
Bank of Yokohama aims to increase holdings of risk assets to 450 billion yen by the year ending March 2016 from about 100 billion yen in the year ended March 2013. Foreign bonds and domestic real estate investment trusts will account for most of the addition, according to the bank’s medium-term plan.
“Foreign bonds will be the main alternative to domestic bonds considering their lower risk and volatility compared to domestic shares,” said Takashi Haraikawa, a spokesman at Bank of Yokohama.
The value of domestic shares held by Japanese banks fell 7.1 percent to 15.2 trillion yen in April from 16.3 trillion yen in October, as lenders reduce cross-shareholdings, according to data from the Bank of Japan. Lenders sold 5.8 trillion yen of domestic government bonds and added 4.3 trillion yen of foreign securities, the data show.
The trend is likely to be permanent, Atsuto Sawakami, founder of Japan’s largest independent mutual fund, said. Further gains for the country’s equities will be driven by a return of individual investors who are sitting on almost $9 trillion of bank savings, he said.
“Japan’s institutional investors will keep on selling domestic shares, though not as much as before,” the chairman of the 297 billion yen Sawakami Fund said. “They’ll never again play an important role in the markets as a net buyer of domestic shares.”
Life insurers also reduced their equity allocations. The value of local shareholdings rose 31 percent in the five months ended March 31, less than the Topix’s return of 39 percent during the period, according to the Life Insurance Association of Japan.
“Domestic financial institutions have cut the weighting of risk assets to prevent investments from damaging their real business,” said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management, which oversees about 5 trillion yen. “What they care about most is investment risks, not returns.”