Concerns over an escalating trade war and volatility in the Asian markets notwithstanding, some U.S. institutions continue to venture Eastward. This week, Institutional Allocator consulted Employees’ Retirement System of Texas (ERS) CIO Tom Tull on his top reasons for being bullish on Japan and China-specific investment strategies. What’s his number-one technique for understanding opportunities and pitfalls there? Travel.
On August 1, Texas ERS formalized a $145 million hedge fund allocation to Japan as part of a Japan investment strategy that totals in excess of $1 billion and includes private and public assets. The total assets under management (AUM) for the Texas ERS plan, including global public and private investments managed for the State of Texas state employees, is currently more than $29 billion. “Though we’re underweight to Asia right now, we’re always looking for opportunities,” Tull said. He said he works with Algert Global, a manager of the fund’s long-short Japan strategy. The fund provides a customized solution for investing in Japanese equities being 150% long and 50% short. “With the U.S. dollar being so strong, there have been more opportunities on the private side versus the public side in Asia because; we can buy more assets at a cheaper price.”
Sights Set on Japanese Corp. Governance
Texas ERS is specifically working to increase independent board members as directors of Japanese companies. “We’ve sent letters to the management of large Japanese corporations encouraging better corporate governance, and we’re not alone,” Tull said. “Lots of boards in Japan have corporate cronyism on very closed boards—we believe that bringing in more outsiders to the board structure will not only build investor trust, but will create a better rate of return and better growth for the corporation,” Tull said. “This initiative is consistent with ERS’ emphasis on good corporate governance.”
American investors had not been interested in the Japanese stock or fixed income markets for a large part of the last two decades, noted James Fadel, V.P. of consultant and client relations at
Nikko Asset Management (Nikko AM). As of June 31, 2018, Nikko AM had $216.1 billion under advisement (AUA), more than $95 billion in Japanese equities and fixed income and over $35 billion in other Asian equities and fixed income.
“Domestic investors within Japan are historically very conservative and the markets themselves were not very attractive for a very long time. That remains the case for Japanese bonds still,” Fadel said. “Japanese equities are a different story—Prime Minister Shinzo Abe’s eponymously-titled ‘Abe-nomics’ has the most effective program to emerge in a very long time. It has spurred corporate governance and the equity markets have responded. This is drawing investors back to the market, most of which had left a long time ago.”
Measuring the Chinese economy using statistics provided by the government is not always reliable, according to market practitioners. Better, they say, to speak with companies firsthand to secure an accurate understanding of consumer and corporate sentiment rather than relying on possibly unreliable numbers, said John Vail, chief global strategist at Nikko AM, who has spent 15 years living in Asia since 1985, including Hong Kong, Taiwan and Japan. “This is true for Asia overall, bur heavily true in China,” he added.
The lack of corporate transparency in Asian markets has caused some problems, Vail continued. “Again, especially in China this is not a rare occurrence,” he said. “I worked in Asian emerging markets back in the eighties—you have to go to a company and ask the hard questions to make sure they’re not playing games with their shareholders and auditors. An inter-relationship between family and corporate money is the most dangerous aspect for a shareholder. Most indexes fail to capture this problem, which is why active management is important for participating in the growth of the Chinese markets,” he asserted.
Boots on the Ground
While the economies and, by extension, the investment opportunities s in China and other countries are improving, it is still very difficult to perform due diligence in a market without boots on the ground, market pros concurred. “My bias leans toward going to the country and spending time analyzing data and companies in-place—my philosophy has always been to go out and kick tires,” Tull said.“You learn a lot by visiting the companies—it’s imperative to visit and do your homework. I just got back from Singapore this week, and we have three people who just returned from Hong Kong.”
Managers and consultants are more likely than asset owners to hire dedicated research analysts who speak the language based in an Asian country, noted Nolan O’Neill, director of manager research at Pavilion Advisory Group. Pavilion Advisory Group, which is the traditional consulting business of the firm in the U.S. and Canada, had $2.3 billion AUA to clients in Asia as of June 2017. Pavilion does not track AUA for American clients that are investing in Asian markets, noted O’Neill. “Access to information and reliability of numbers at a company-specific level is not quite up to par with the developed world,” he said. “Information is hard to obtain and trust, both from a manager’s and a consultant’s perspective. This is also affected by local government policies.”
Asian markets are uniformly down year-to-date, but are expected to rise*
- Shanghai: -19.7% YTD
- Hong Kong: -6.5% YTD
- Shenzen: -27.8% YTD
- Japan: -0.7% YTD
- Korea: -9.3% YTD
- Indonesia: 14.2% YTD
*Data from Bloomberg.