Dollar hedging, other factors coming into play to broaden exposure
Japan Post Bank Co., with $1.9 trillion to put to work, might be the biggest institutional investor in Japan looking to diversify a U.S.-dominated book of offshore credit exposures, but it's not alone.
There's a material increase in the number of Japanese asset owners actively looking to boost their European exposures, driven more by the rising costs of hedging dollar-denominated assets back to yen than investors' faith in Europe's macro or micro economic fundamentals, said Yasuhisa Nitta, Tokyo-based CEO of PGIM Japan Co. Ltd.
The same forces are prompting Korean investors to look beyond U.S. dollar-denominated debt instruments as well, said Simon England-Brammer, Hong Kong-based senior managing director and head of Asia-Pacific for Nuveen.
A Tokyo-based executive with one London-based money management firm, who declined to be named, said Japanese investors — slow to dilute their reliance on the huge U.S. credit market — have made a big tactical shift this year. The trade could persist for 12 to 18 months if the eight-year bull market can persist that long, he predicted.
Some money management executives see a more nuanced logic behind the growing interest of Japanese investors, and Asian investors more broadly, in Europe.
"The question of dollar hedging is a factor, but it's not the only one," said Thomas Friedberger, CEO and co-chief investment officer of Tikehau Investment Management, a Paris-based asset manager with €14.2 billion in private debt, real estate, private equity and liquid investment strategies.
The fast growth in Europe's loan market and the rapid development of its alternatives marketplace are also factors sparking greater interest from Asian investors, even as rising trade tensions and protectionist rhetoric from the U.S. provide further incentives to diversify exposures, said Mr. Friedberger.
Tikehau is dedicating "more resources to Asia" now to better handle the growing number of discussions with Asian investors, he said.
Asia-based investors accounted for 4% of the firm's assets under management at the end of 2017, up from zero two years earlier, according to data provided by the company.
Even a year ago, the number of Asian investors focusing on what their allocations to European bank loans should be, vis-a-vis U.S. bank loans, was relatively small, but with record M&A activity in Europe this year resulting in more bank loan issuance, those conversations have picked up considerably, said Vijay Rajguru, London-based global co-chief investment officer with $37 billion credit manager Alcentra Ltd.
Broadly speaking, Asian investors feel they'd like to diversify a little more into Europe than they have in the past, but with the U.S. bank loan market still five times bigger than Europe's, many have questions about the scale of allocations they'll be able to put to work there, said Mr. Rajguru. That, in turn, has left many Asian investors open to discussions about global, total return mandates that give Alcentra's portfolio managers discretion to pursue value wherever it can be found, he said. Mr. Rajguru declined to name new clients.
David F. Hoffman, Philadelphia-based managing director and portfolio manager with Brandywine Global Investment Management LLC, said that willingness to give managers unconstrained mandates — the flexibility to "move where the value is" — is growing now as the investment outlook in the credit space becomes more challenging.
Asset owners with hefty allocations to credit nine years into the current bull market may look in the rear-view mirror and conclude that risks are low but with current spreads so narrow the odds of getting the types of returns they've grown accustomed to is "zero," said Mr. Hoffman.
He pointed to one of Brandywine's newer, hedge fund-like products, its global unconstrained fixed-income enhanced strategy, launched in late 2012, as the type of flexible vehicle needed in the current market. Over 5 1/2 years, the dollar-denominated strategy, with roughly $1 billion in assets under management, has delivered annualized returns of 8%.
Tariq Ahmad, Singapore-based CEO of Brandywine Global Investment Management (Asia) Pte. Ltd., said the increased cost of currency hedging has left discussions with clients and prospects in the region "very much geared" to that strategy.
Current hedging costs can gut returns on traditional fixed income strategies but are less of an issue for a strategy delivered annualized returns in excess of 8%, with long/short capabilities better able to capture value anomalies, he said.
Glenn Clarke, institutional portfolio manager with Hayfin Capital Management LLP, a London-based manager with roughly €10 billion in assets under management across European-focused private credit, global high-yield credit and securitized credit strategies, said Japanese investor willingness to consider less liquid strategies — like private credit — has increased considerably over the past two years.
Against that backdrop, money that was previously allocated to fixed-income strategies, including high-yield or collateralized loan obligation vehicles, is shifting to private credit strategies, including direct lending. Last year, Hayfin raised €3.5 billion for its direct lending strategy and €2.2 billion for its special opportunities strategy, with Asian investors contributing about 20% to each.