Japan Post Bank will continue to shift trillions of yen from Japanese government bonds to offshore credit, but the Tokyo-based giant's next round of mandates might yield lower fees for money managers.
Meanwhile, the next important allocation change for the bank's ¥207.8 trillion ($1.82 trillion) portfolio will be a steady, deliberate move into alternatives, the firm's investment chief said.
Katsunori Sago, the ex-Goldman Sachs Group Inc. executive who took the helm of Japan Post Bank's investment division in June 2015, said in an interview the bank's “biggest allocation change” — its move into mostly U.S. credit from JGBs, which began before he arrived — is likely “to continue ... given the current JGB yield level.”
In Tokyo trading on March 17, the benchmark 10-year Japanese government bond was yielding just less than eight basis points.
The challenges that scant yields have posed for what JP Bank terms the JGB-heavy “base,” or liability-matching, segment of its portfolio, have led to faster-than-anticipated growth for its “satellite” portfolio of higher-yielding investments, dominated by foreign bonds.
The satellite portfolio reached ¥60 trillion by the end of 2015 — more than two years ahead of the March 2018 target set at the start of 2015 in the firm's medium-term management plan — and ¥68.8 trillion by the end of 2016.
Between March 31, 2015, and Dec. 31, 2016, Japanese government bonds dropped to ¥73.5 trillion, or 35.3% of JP Bank's investment portfolio, from ¥106.8 trillion, or 51.9%. Over the same period, the bank's externally managed foreign bond holdings more than doubled to ¥30.2 trillion, or 14.5% of the total, from ¥14 trillion, or 6.8%, while its internally managed foreign bonds holdings climbed to ¥21.2 trillion from ¥18.8 trillion.
That ¥16.2 trillion jump in foreign bond mandates, which equates to roughly $6.7 billion a month, has made JP Bank the institutional client of choice for bond managers the world over.
In recent years, having JP Bank as a client has been the key factor determining whether a manager's business in Japan has been growing or not, said one executive with a global firm managing money for the bank, who declined to be named.
Mr. Sago conceded that, with more than $250 billion already allocated to active credit managers, “we're going to reach some sort of limit at some point.” With about 30 active external managers, and a broad range of exposures to investment-grade, bank loans and high-yield bonds, the bank is effectively buying the market, and getting more beta than alpha for its efforts, he noted.
One response: Starting this month, JP Bank began investing in beta — or passive — credit strategies, at “much cheaper” fees, said Mr. Sago.
A JP Bank spokesman said new allocations will be a mix of active and passive mandates.
Some of the bank's active managers, speaking on condition of anonymity, said they see room for further hefty allocations but at lower fees than previous mandates.
Whether active or passive, Mr. Sago said the continued growth of the bank's investments in higher-yielding assets has made the use of the term “satellite” for those allocations somewhat outdated.