Japanese equities have a weighty role in the actively managed portfolio at Danica Pension — but the Danish pension fund also sees limitations in terms of suitable supply within the Japanese markets to cater to its developed markets needs.
“The Japan equity market has some more conservative companies, where we don’t see return potential for us. Some changes are happening, but we have mostly looked at consumer goods companies where Japan [is] globally leading, and that leading position makes them appealing whether they are listed in Japan or elsewhere,” Esben Larsen, head of equities at Danica Pension, told AsianInvestor.
The Danish pension subsidiary of the Danske Bank group had assets under management (AUM) worth DKK416 billion ($59.5 billion) as of end-2022, of which about DKK120 billion were invested in equities.
Danica Pension invests directly in Japanese equities, and the view from Larsen and Danica is that Japan has a two-part stock market. Some stocks have been priced quite high while others have been priced quite low, and the pension fund has typically allocated to the more expensive stocks of modern growth companies promising a lot of development potential.
“Companies that are primarily exposed towards the Japanese markets, for instance, would have been a special case [that caught] our eye,” Larsen said.
The trend in the 80s and 90s favoured the conglomerate model whereby one company was expected to diversify and make everything within the corporation. This approach was deeply rooted in the Japanese Zaibatsu conglomerate model. By contrast, Danica’s current equity strategy looks particularly at return on equity and capital allocation.
“As an investor, we prefer to diversify at a portfolio level and pick the winners in each sector. Even if one fails, we are then overall diversified. Thus, the discount on these Japanese conglomerate stocks must have future drivers for us to invest, such as a break-up case or a new management structure, or else we prefer to stick to specialised companies,” Larsen said.
When it comes to Japan, Danica Pension sees the market as a part of the developed markets in the West. Currently, US stocks are dominating in global mandates benchmarked to the MSCI World Index, and Japanese stocks make up 7-8% of Danica’s developed markets portfolio — against a previous 10%.
“We have had times where we have been very bullish on Japan and thus overallocated, like we are on India now. Currently, we are probably neutrally weighted and follow the market weighting,” Larsen said.
Japanese macroeconomics is also exerting an indirect influence on Danica Pension’s general portfolio and asset allocation strategy. Recently, the Japanese government announced Kazuo Ueda as the new Bank of Japan governor, a move that might indicate a shift in decades of ultra-low interest rates in the world’s third-largest economy.
“The recent interest rate influences us indirectly, since Japanese investors have been bullish on Danish mortgage bonds. With Japanese government bonds taking a tick up, we could see their exposure to Danish mortgage bonds dwindle, and that has a ripple effect on us with a home-biased portfolio,” Larsen said.
Larsen explained that Asia’s emerging markets take up the lion’s share of focus within Danica’s emerging markets pool. The Danish pension fund separates its equity portfolio into three pools: emerging markets, stocks in the domestic market, and global stocks within the developed countries.
The latter includes developed Asian markets Japan and Singapore. Meanwhile, the rest of Asia dominates Danica’s emerging markets exposure, at around 85%, Larsen said.
Also read: Danica Pension upbeat on Asian equities
Danica Pension is a wholly-owned subsidiary of Danske Bank, and handles the Danske Bank Group’s activities for companies, organisations, and private individuals within the pension savings and life insurance space.