Nomura’s Top Quant Says Bubble Has Burst for Japan’s Shame Gauge

Investors trying to get rich by stepping in front of Japan’s $1.1 trillion retirement fund before it buys the JPX-Nikkei Index 400 are due for disappointment.

That’s the view of Akihiro Murakami, chief quantitative strategist at Nomura Holdings Inc. in Tokyo, who says it’s time to give up on purchasing the gauge on speculation the Government Pension Investment Fund is about to pile in, too. GPIF’s holdings of the index will probably remain small, said Murakami.

The JPX-Nikkei 400 gained global attention for its ambitions to prod companies into dipping into cash hoards to boost return on equity. On that score it’s succeeding: ROE is increasing for companies across Japan. Still, expecting the JPX-Nikkei 400 to beat the market is a mistake, Murakami said.

“It’s had an impact on profitability and governance,” Murakami said in an interview in Tokyo on Jan. 23. “But from a quants perspective, it’s all about performance. And in terms of that, it’s not doing much.”

The JPX-Nikkei 400 rose 8.5 percent in 2014, compared with a 8.1 percent increase for the Topix. After three quarters of outperformance, the trend reversed in the last three months of the year, when it posted a 5.9 percent advance against the Topix’s 6.1 percent gain.

“We’re seeing a shift from excessive expectations to more realistic views,” Murakami said.

The world’s largest pension fund gave the first glimpse of its plans for the index when it released annual results in July. GPIF had 151.1 billion yen tracking the JPX-Nikkei 400 at the end of March, according to the report. That was less than 1 percent of its Japan equity holdings. About 17.9 trillion yen, or 86 percent, was in passive investments following the Topix.

Track Record

It’s normal to start with a small amount given the newness of the index, said the measure’s creator, Daisuke Tanaka of Japan Exchange Group Inc.

“The fact is that GPIF invested about 150 billion yen in an index with no track record,” Tanaka said in an interview in Tokyo on Jan. 23. I expect to see more assets tracking the measure.’’

Tanaka points to other successes. About 510 billion yen was following the JPX-Nikkei 400 in exchange-traded and mutual funds as of Jan. 28, according to the bourse.

Futures started in November and average daily trading volume last month was about three times that of so-called mini futures on the Topix, according to JPX data.

Murakami says even if GPIF’s taking a wait-and-see approach, the fund’s mandate is to avoid moving markets. The Topix contains many stocks with low liquidity that would be susceptible to price declines if sold, so it’s unrealistic to expect GPIF to offload Topix holdings to put more money in the JPX-Nikkei 400, he said.


“Foreign investors told me they were shorting the Topix and going long on the JPX-Nikkei 400 on expectations of GPIF buying,” Murakami said. “It’s a little over-the-top.”

The pension fund said in October it would more than double its goal for domestic stocks to 25 percent of assets. Murakami says this will result in purchases totaling 1 trillion yen at most. Before factoring in investment returns, GPIF will have to cash out about 3 percent of assets annually to meet pension payouts, he said. These are paid from domestic bonds, reducing the need to buy more equities.

While central-bank buying of exchange-traded funds will increase assets tracking the JPX-Nikkei 400, the inflows will be smaller than for the more established indexes, the Topix and the Nikkei 225 Stock Average, Murakami said. The Bank of Japan has said it will invest in ETFs roughly in proportion to their market value.

Of listed ETFs tracking the three indexes, those following the Nikkei 225 accounted for 55 percent of the total as of Jan. 28, compared with 41 percent linked to the Topix and 4 percent to the JPX-Nikkei 400, according to research by Daiwa Securities Group Inc.

Outperforming Market

“BOJ buying is positive for the JPX-Nikkei 400,” Murakami said. “But it won’t help it outperform the market.”

When it comes to changing company behavior, Murakami says the JPX-Nikkei 400 seems to be achieving its goal for businesses on and off the gauge.

Amada Co., a machinery maker, pledged in May to pay out all its profit to shareholders through buybacks and dividends as it seeks to make the cut. Ichigo Group Holdings Co., which invests in real estate and solar power, has vowed to increase ROE to more than 15 percent by 2016 in a bid to be included.

Return on equity, a measure of how much profit companies earn from shareholders’ funds, on the JPX-Nikkei 400 stood at 9.4 percent at the end of December, up from 9.1 percent at the end of March, according to data compiled by Bloomberg. That compares with 8.5 percent for the Topix at year-end. Two years before, Topix ROE was at 5.7 percent, the data show.

“Companies are still very keen to get on the index, and we’re seeing them formulate ROE targets,” Murakami said. “This is a good thing.”

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