Research

Introduction

Eurekahedge was commissioned by AIMA (Japan) to conduct a survey of Japanese investors. The survey itself was conducted from end of March to April 2014 to gauge important insights into market sentiment, investment trends and key regulatory challenges facing the Asian asset management industry, with a particular emphasis on the outlook for Japan. The key findings from this survey are presented in this paper based on responses submitted by a total of 131 survey participants. As for the investment advisors who participated in the Survey, they are collectively advising and/or managing assets in excess of US$3.8 trillion.

The major findings of the Survey can be summarised as follows:

1. The market outlook of the participants was fairly bullish in comparison to the current policy and market levels.  
   • For Abenomics, 88% saw it as having a positive effect on the Japanese economy in 2013, and 72% thought that its positive impact will continue into 2014.  
   • For the Nikkei 225, 72% expected it to finish 2014 above the 15,000 mark, 51% thought that it would be higher than 20,000. For the US$/JPY rate, 8% thought it would fall below 100 by the end of the year, while 44% thought it would be between 100 – 105, and 48% thought higher than 105.  
   • For the JGB 10-year yield, 69% expected it to remain below 1.0% for 2014, and 68% expected the Japanese central bank to continue its policy of buying JGB at the same level.
      
2. The investment trends amongst the market participants did not reveal a significant change from their current asset allocation ratios, as 84% of the responses answered no when asked if they would change asset allocation ratios. Other finds included:  
   • Ratio of alternative assets within the portfolio (average) was unchanged at 35%.  
   • In terms of regional allocation within alternative assets, Global, Asia excluding Japan, Middle East/Africa would be increased, while Latin America and Europe would be decreased. Japan would be the same.  
   • Strategy-wise, long/short equities and event-driven would be increased, while CTA, macro, and fixed income were cited as decreased.
      
3. In terms of challenges which the respondents say going forward, over 30% of the respondents mentioned increased inspections and regulations by the J-FSA, followed by the increased requirements imposed by the Dodd-Frank Act. The stricter capital requirement imposed by Basel III was third. The biggest worry for the markets for 2014 and beyond was China, followed by volatility in interest rates, and the Federal Reserve’s tapering of its quantitative easing policy.
    

SECTION I: RESPONDENT PROFILE

1. Where are you currently residing?
2. Where are your headquarters located?
3. What sector are you in?
4. What is the size of your investment advice?

As illustrated in Figure 1, the vast majority of the survey respondents (82%) were based in Japan. Figure 2 states that 72% were headquartered in Tokyo and 7% in Japanese cities other than the capital.

A sector-by-sector breakdown of the survey respondents reveals a diverse background, with 39% hailing from the investment advisory industry, followed by 14% from the banking sector and 15% and 11% from the consultancy and hedge fund industry respectively as illustrated in Figure 3. For respondents from the investment advisory sector, over 60% indicated managing upwards of 20 clients.

Figure 3: Sectoral Breakdown of Respondents

Figure 4 reveals the size of investment advice offered by our respondents. 57% of our respondents indicated advising upwards of US$1 billion in assets. Roughly 21% oversaw between US$100 million to less than US$1 billion in assets and 22% advised less than US$100 million of assets.

Collectively, those which refer to themselves as investment advisors either manage or advise assets in excess of approximately US$3.8 trillion.

 Figure 4: AUM of Investment Advisees

 

SECTION II: MARKET OUTLOOK

1. Do you think Abenomics has had a positive effect on the Japanese economy?

1. If you selected yes, do you think that Abenomics will continue to have a positive effect on the macroeconomic environment?
2. If you selected yes, which of Abe’s ‘Three Arrows’ (monetary easing, fiscal stimulus, and deregulation) has had the largest impact on the economy so far?
    

2. What is your forecast for the level of the Nikkei at end-2014? 3. What is your forecast for the level of USD/JPY at end-2014? 4. What is your forecast for the level of the Japanese interest rate (10 year) at end-2014? 5. The Bank of Japan is currently buying 70% of JGBs on a monthly basis. How much do you think they will be buying at end-2014?

The second section of the survey explored key expectations regarding important macroeconomic themes pertaining to Japan.

Our respondents were asked to gauge the success of Abenomics on the Japanese economy in 2013. As is elaborated in Figure 5, a clear majority (88%) indicating that the policy had been largely a success. Of those who believed that Abenomics had a positive impact on the Japanese economy last year, 72% indicated that they were optimistic on the policy delivering beneficial results in 2014 as well while 28% believed the Abenomics had stalled.

Figure 5: Expectations towards Abenomics

 

Figure 6 shows that of the majority of the respondents, 85% believed that monetary easing was the most important component of Abenomics with regards to vitalising the Japanese economy. This should come as no surprise given the gain in the domestic stock indices on the back of a depreciating yen in 2013. Of the remaining respondents, 9% believed that de-regulation was the most important factor in terms of its impact on the Japanese economy while 6% pinned the success of Abenomics on the fiscal stimulus.

Figure 6: Which of Prime Minister Abe’s ‘Three Arrows’ has had the largest impact on the economy so far?

 

The next four questions asked about their expectations of the outlook in the Japanese stock markets, with the Nikkei 225 Index serving as our proxy for market sentiment. Figure 7 shows that a majority of the respondents, 72%, indicated that they expected the Nikkei 225 Index to end 2014 in upwards of 15,000 while 28% appeared less optimistic and believed the index would remain below this mark. A closer look at the results revealed that of those who remained more upbeat about the prospects of the Nikkei 225 Index, 51% (out of the 72%) believed the index would breach past the 20,000 mark by the end of 2014.

Figure 7: Nikkei 225 Index at end-2014?
 

Respondent expectations about the level of the Japanese yen versus the greenback showed a much larger spread as illustrated in Figure 8 below. Of our respondents, 8% believed the yen would appreciate relative to the US dollar in 2014 and end below the 100 mark. 44% anticipate the US$/JPY trade to remain in the 100-105 range while 48% of the respondents indicated the yen would depreciate significantly with the US$/JPY trade surpassing the 105 mark. Of this last category, 41% (out of the 48% of respondents) believed the yen would remain in the 106-110 yen/dollar range, 1.6% expected the 111-115 range while 4.9% anticipate the yen to depreciate further - beyond the 115 yen/dollar mark.

Figure 8: US$/JPY at end-2014?

Figure 9 shows the respondent expectations in 2014 for the JGB 10-year yields. Of the respondents, 69% expected the JGB 10-year yields to remain below 1.0%, with almost 66% of these respondents (out of 69%) anticipating yields to remain between 0.5% to less than 1.0%. One-third of the respondents, 31%, expect yields to rise above the 1.0% mark while remaining below 2.0%, of these 24% (out of 31%) anticipate yields between 1.0%-1.5%.

Figure 9: JGB 10-year Yield at end-2014?

Figure 10 shows the expectations of survey respondents with regards to the Bank of Japan’s (BoJ) bond buying program. The majority of our respondents, 68%, maintain that the BoJ will not alter its bond purchases, 22% anticipate an increase, while 10% expect a decrease in the BoJ’s monthly bond purchases. These results come across as surprising given the heightened expectation in the markets of an increase in the BoJ’s bond purchases, especially given the recent slack in Japanese economic activity following the newly imposed sales tax hike. Furthermore, given the recent pressure on GPIF (Government Pension Investment Fund) – the world’s largest pension fund, to reduce its exposure to Japanese government bonds, there is an increased expectation in the market that the BoJ will need to make up for GPIF’s reduced demand for government bonds in case of change in the formers portfolio.

Figure 10: Bank of Japan (BoJ) Bond Purchases

 

SECTION III: INVESTMENT TRENDS

1. What % of your portfolio is bonds, equities, alternative funds (HFs, FoFs, PE), traditional funds, and cash?

1. Do you intend to change the ratio next year?
2. If you selected yes, what will the new ratio be?
    

2. Do you have a preference for investing via managed accounts?

3. What is your current ratio of JPY-denominated assets vs. foreign currency-denominated assets (including euro JPY assets)?

1. Do you intend to change the ratio next year?
2. If you selected yes, what will the new ratio be?
    

4. What % of asset (within alternative assets) do you hold?

1. Do you intend to change the ratio next year?
2. If you selected yes, what will the new ratio be?

5. Which strategies are you interested in allocating to in 2014?

6. Which regions are you interested in allocating to in 2014? 7. In what order of importance do these factors affect your decision upon an investment (e.g. ODD clearance, liquidity)?

The third section of the survey asked respondents about their investment preferences and how they expect to change it going into 2014.

Figure 11 shows our respondents portfolio allocations across asset classes in 2013 as well as their planned allocations in 2014. Although the majority of respondents indicated little or no change in their portfolio allocations, minor changes were voiced as illustrated in the figure below.

Looking at the broader picture, respondents indicated increasing their exposure towards alternative funds, infrastructure and commodities albeit the increase is marginal. It is interesting to note that the largest planned increase is in the respondent’s portfolio of cash/currencies. Given that the survey was conducted in the early part of 2014, the recent downturn in the Japanese markets might explain this increase in the holdings of cash/currency reserves as investors look towards the BoJ for further support. Meanwhile, the results indicate a reduction in exposure towards bonds, equities, real estate and traditional funds although once again the change is nominal.

Figure 11: 2013 and 2014 Portfolio Allocations


 

The second question in this section asked respondents asked about their inclination for investing via managed accounts, with less than 20% indicating a preference for it.

Figure 12: Preference for Managed Accounts


 

The third question asked about the current and 2014 planned holdings for JPY-denominated and foreign currency denominated assets (including Euro JPY assets). In 2013, 69% of all holdings were JPY denominated, with respondents indicating a small planned decrease in their holdings to 57% of the portfolio for 2014 and beyond.

Figure 13: JPY Assets vs. Non-JPY Assets


 

Figure 14 shows the breakdown of assets within the alternative investment sphere for our respondents, along with the planned changes they envision going into 2014, which was in response to the further questions asked in this section.

The bulk of the assets are locked into hedge funds – 73% with respondents holding their allocations roughly steady for 2014 and beyond. This should come as little surprise given the performance of Japan investing hedge funds, which were up 27.90%¹ in 2013, their best annual performance on record.

The next big constituent is funds of hedge funds, which account for roughly 17% of portfolio allocations to alternative investments in 2013. Our respondents indicted increasing their exposure to multi-managers by roughly 1.5% for 2014 and beyond. The Eurekahedge Japan Fund of Funds Index was up 27.85% in 2013, matching the performance of single managers with a lower risk factor as multi-managers can diversify across range of hedge funds managers and investment strategies.²

Private equity and venture capital funds were the next main constituents, although our respondents indicated decreasing their exposure to these asset classes.

Figure 14: Distribution of Assets (Within Alternative Investments)

The fifth question in this section asked about the asset allocations across hedge fund strategies. In another words, it asked what kind of strategies our respondents planned to have exposure to for 2014 and beyond.

Looking at the broader picture, our respondents intend to increase their exposure to long/short equities and event driven strategies by the largest amount – a 46% and 34% increase respectively. This should come as little surprise given that these two strategies, especially deployed with a Japan mandate delivered exceptional returns (above 25%) in 2013.

On the contrary, investors intend to decrease their allocations to CTA/managed futures, macro and fixed income strategies by 23%, 18% and 13% respectively. For the remaining investment strategies, future allocations remain largely unchanged as depicted in the figure below.

Figure 15: Strategic Allocations - Hedge Fund Strategies

 

Respondents were further asked about their asset allocations across regional mandates with the results as depicted below in Figure 16. The majority of the respondents indicated little or no change in their exposure to Japan and North America, while indicating that they planned to reduce their asset allocation to Europe and Latin America.

Figure 16: Strategic Allocations – Geographical Mandates

Our respondents were further asked to rank the key criteria that determine their investment decisions, with the results as summarised in Figure 17.

For the vast majority of respondents, manager performance, risk metrics and track record in the industry were the vital factors determining their investment decisions. Brand name of the funds, governance structure and liquidity ranked lower on the scale.

Figure 17: Key Criteria Determining Investment Decisions


 

SECTION IV: CHALLENGES

The third section of the survey gauged the market sentiment with regards to the broad economic and regulatory themes that were of primary concern to respondents.

Regulatory challenges were asked as a separate question, followed by a more general question on other challenges ahead.

In terms of the regulatory challenges facing the industry, the results in Figure 18 show that the majority of the respondents remain apprehensive of the increase J-FSA inspection and regulations, with over one-third of the respondents citing this as their biggest regulatory worry going forward. The Dodd-Frank Act in the US ranks as the next important regulatory hurdle, with 25% of the respondents expressing apprehension about the aforementioned bill and its requirement for managers to register with the SEC.

Figure 18: Regulatory Challenges


 

Asked about their biggest worry for 2014 and beyond, almost one-third of the respondents (as depicted in Figure 19) cited China. Given the recent slowdown in Chinese GDP growth figures, their first on-shore bond default and a ballooning in the country’s credit in the shadow banking sector; an implosion in the Asia Pacific’s largest economy could indeed cause strong headwinds not just in regional but also in global markets. Compounding these economic worries could be the rising regional tensions over territorial disputes in the Asia Pacific region.

The next biggest source of worry for the markets remains volatility in the interest rates and any adverse impact on the market from the Fed’s QE tapering. Already, the Fed’s QE scale back has dented market sentiment in the start of 2014, and apprehensions in this stead are in line with the planned reduction in our respondent’s portfolio exposure to Latin America (Refer to Figure 16) which has seen strong capital outflows.

Interestingly, developed market and Euro zone periphery debt levels are the least source of worry for investors, which appears to be in line with the strong asset inflows we have seen into North American and European hedge funds since 2013.

Figure 19: Biggest Worry for 2014 and Beyond

The full survey results and analysis are available to AIMA’s and Eurekahedge’s subscribers and the survey participants only. For more information, please contact advisor@eurekahedge.com to enquire on how to obtain the full survey results and analysis.