The chief investment officer of Japan Post Bank's ¥207.1 trillion ($1.8 trillion) portfolio, who has overseen net allocations of roughly $130 billion to global credit managers over the past two years, believes valuations in key market segments such as investment-grade and high-yield bonds are now "reasonably stretched."
Still, Katsunori Sago, the former Goldman Sachs Group Inc. executive who took the helm at JP Bank in mid-2015, said in an interview it's not clear whether a correction can be expected over the coming year.
Mr. Sago conceded he is one of many investors around the globe who continue to buy those bonds even though they're not happy with current valuations. "I really don't want to buy high yield at these levels, but I have to buy it, because there's nothing else available."
As the hunt for value becomes more challenging, Mr. Sago said his team is recycling a lower proportion of the portfolio assets coming due from maturing legacy Japanese government bond positions into credit. "We invest 50% to 75% — closer to 50% — of redemption money to new investments, and the balance goes to (Bank of Japan) deposits," he said.
Mr. Sago said one-on-one meetings he had while in Washington last month at the time of the International Monetary Fund-World Bank conference showed considerable optimism among policymakers and business leaders about the state of the global economy. "Everyone is basically optimistic or at least cautiously optimistic," he said, which is "a bit scary" and points "unfortunately" to the prospect of asset prices continuing to push higher.
That cautious tone by the investment chief of a bank which, together with its affiliate Japan Post Insurance, has issued a tidal wave of credit mandates in recent years, doesn't necessarily suggest an end to those allocations.
Mr. Sago said he would look on a significant correction in the market over the coming year more as an opportunity than something to be feared.
"From our point of view, if there's any large correction, mark-to-marketwise, it would be a bit painful but we have decent unrealized gains (so) losing some of that wouldn't really bother us," he said.
Meanwhile, as of Sept. 30, Japan Post Bank had ¥52.7 trillion, or roughly 25% of its portfolio, in cash, up from 20% a year or more before — an ample war chest to take advantage of any opportunities that might present themselves, he said.
Mr. Sago said he's hoping to see a correction in the coming year, but "I really don't know."
For now, Mr. Sago said his investment team is adding more passive credit exposure, awarding separate account mandates tasked with matching benchmark returns, at relatively low fees. JP Bank made its first allocations to passive credit strategies early this year after concluding that combined active allocations exceeding $250 billion were giving the portfolio more beta than alpha.
"For the last couple of months, we have been investing into passive funds more than active funds in the credit space," he said.