GPIF-Picked Manager Doubting Abe Leads Top Japan Bond Fund

Keisuke Tsumoto competes with Pacific Investment Management Co. and Japan’s biggest banks in picking bonds for the world’s largest pension fund. Being a skeptic of Shinzo Abe’s policies is helping him win.

“Abenomics is a huge social experiment, but it will be difficult to change the big trends,” said Tsumoto, 48, in an interview on July 8. “The economy’s growth potential is declining, so no matter how much stimulus is injected, a return to deflation is likely under my main scenario.”

Tsumoto’s strategic active bond fund at Manulife Financial Corp., where he’s the Japanese asset-management unit’s head of fixed income, is vying for the title of best performing domestic bond fund since Abe came to power for a second time in December 2012. He oversaw 418.3 billion yen ($4.1 billion) for Japan’s Government Pension Investment Fund at the end of March, one of three overseas active bond managers selected for the role along with Pimco and Prudential Investment Management Japan Co.

Prime Minister Abe said last month deflation that wiped out much of Japan’s growth over the past 15 years is gone and his government will target lower corporate tax rates to spur investment. For Tsumoto, Abenomics is just the latest episode in the nation’s efforts to stem falling demand with near-zero interest rates. He’s sticking with a bond picking strategy he’s followed since about 2000, and doing better than ever.

Market Distortions

Tsumoto often cycles up to 40 kilometers before arriving at his office on the 15th floor of a building overlooking Tokyo Station. There, he and his team review the risk-weighted yields of bonds out to more than 20 years, deciding which to sell, hold and buy that day. Tsumoto spends much of his time looking for distortions between government debt of different maturities, the same strategy he’s been employing since Japan first lowered interest rates to near zero about 15 years ago.

He carries out a so-called roll-down approach that earns price gains by holding longer debt when shorter notes have lower yields. It’s a tactic Pimco’s Bill Gross has also espoused.

Tsumoto’s active core fund returned investors, including GPIF, 0.9 percent, or 0.32 percentage point more than the Nomura Bond Performance Index last fiscal year. That compares with an average 0.78 percent GPIF earned from nine active debt managers including units of Japan’s three largest banks, data from the pension fund show.

Active Fund

His Manulife Strategic Active bond fund, which is more risk oriented, was the second-highest performer in the 15 months to March 31 among about 45 comparable Japanese debt funds, according to data from Mercer, the consulting division of New York-based professional-services firm Marsh & McLennan Cos. In 2013, it returned 1.25 percentage points more than the Nomura BPI, the industry benchmark, and triple the median return eked out by peers.

“Tsumoto is the kind of person who takes his time and advances matters in a careful manner,” said Genji Tsukatani, a portfolio manager in Tokyo at JPMorgan Asset Management, who worked under him when they were both at Schroders Plc. “He’s a skillful presenter and that probably helped in winning the GPIF mandate.”

As a debt investor, Tsumoto has witnessed two decades of Japan’s economic stagnation first hand. When he started helping manage bonds at the now-defunct Long-Term Credit Bank of Japan Ltd. in 1991, the 10-year government bond yield was about 6 percent. Twenty-three years later, the rate fell to as low as 0.53 percent today, the lowest in the world and the least since April 2013.

Bank Crisis

Long-Term Credit Bank of Japan sent Tsumoto to a Master of Business Administration program at the University of Chicago in 1994, where he was awed to see Nobel Prize winners walking around the grounds. He worked at a LTCB-affiliated asset-management firm in suburban Philadelphia for two years after getting his MBA, just as the banking crisis in Japan that brought down his employer started to get serious.

“When bad debt began to suffocate LTCB, fortunately or unfortunately I was in the U.S.,” Tsumoto recalls. “There were a number of University of Chicago graduates who were bankers, but the names of their banks started changing. We discussed whether we were going to have a workplace to go back to.” Tsumoto took early retirement in 1998, before LTCB was nationalized and eventually sold to foreign investors in 2000.

Cycling Enthusiast

Tsumoto moved to UBS AG, Schroders and then Henderson Group Plc. Along with thousands of others, he lost his job at the start of 2009, near the height of the global financial crisis. For the half year that he was out of work, he cycled every day, and made keeping up to date with financial and market news a priority so as to not lose his edge. Manulife, Canada’s largest life insurer, hired him later that year.

Tsumoto, who is 1.79 meters tall (5 foot 10 inches), dreams of one day riding his Pinarello bicycle through the mountain passages used in the Tour de France. On weekends, he cycles 100 kilometers.

Abenomics may be too little too late to reverse the economic consequences of a declining population and falling productivity, Tsumoto says. While he doesn’t rule out the chances of Abe’s policies succeeding, it’s unlikely and Japan’s government bond market is signaling that too, he said.

Debt Triples

The BOJ, led by hand-picked Abe governor Haruhiko Kuroda, has been buying about 7 trillion yen a month of sovereign notes since 2013 to fuel 2 percent inflation in a nation where monthly consumer-price rises have averaged 0.3 percent since 1991. Government debt has tripled since June 1996 to 1.02 quadrillion yen as of March, bigger than China’s entire annual economic output, as succeeding administrations borrowed to foot stimulus measures.

Abe’s government also raised the consumption tax rate in April to 8 percent from 5 percent, and is considering another increase to 10 percent next year to help support an aging population. Family heads 65 years or older will account for about 41 percent of households by 2035, when the population is estimated to fall to about 112 million from 127.1 million as of June 1, government statistics show.

When unadjusted for inflation, Japan’s economic output has shrunk 3.5 percent from when Abe first took office in September 2006, according to government data.

“Abe is saving time for the economy, but overall it isn’t changing,” said Tsumoto. “It’s hard to imagine there’s a bright future after this period of calm.”

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