Tomonari Kadoumi is general manager of the separate accounts investment division at Sumitomo Life Insurance Company. The unit offers investment products to corporate pension funds and individuals, mostly via single-premium variable annuities.

Clients select product managers and the separate accounts department decides on the asset allocation. In terms of selecting foreign fund managers, the business acts on advice from Sumitomo Mitsui Asset Management, which provides lists of securities to be traded including overseas assets. The separate accounts department executes on those trades according to these lists.

Q What are your assets under management?

A I am in charge of investment for separate accounts at Sumitomo Life, and the AUM of that business is ¥3 trillion ($29.1 billion). The money is invested on behalf of corporate pension funds and individuals, mostly via single-premium variable annuities. We have more than 600,000 contracts.

Q How is your general account money allocated?

A At the end of fiscal 2012, the AUM of our general account was ¥23.4 trillion, and this is commingled. Almost half of that is invested in the domestic bond market. We also invest in foreign-currency-denominated foreign bonds, which are limited to government bonds of countries with high credit ratings and other low credit risk instruments.

In fiscal 2012, we controlled our currency risk with a full foreign exchange risk hedge on the principal of these investments. Japanese stocks only represent 4.4% [of our portfolio], which is very small compared with other major Japanese insurance companies. Loans and real estate make up about 15%.

Q Can you give me a break down of your separate accounts?

A We offer a variety of investment products to pension plan clients. We have one balanced fund and 13 individual asset funds. Each client selects a fund according to their own needs.

As for domestic equity, we have six funds with characteristic features, such as passive, small-to-medium-sized stock-type and value. They select investment product managers through Sumitomo Life, and we decide the asset allocation.

All investment gains go to our clients and we distribute dividends. We have a balanced fund product, for example, where clients take from separate buckets of securities. We also have individual funds that invest in stocks, domestic or foreign bonds and foreign exchange. Our most aggressive clients would be 100% equity.

Q Can you talk about your returns over the past year?

A Our typical balanced fund earned 9.22% during the first half of this fiscal year [April to September 2013].

Q What would a typical exposure to overseas assets be for separate account clients?

A I would say 30%, and it’s growing.

Q How do you choose the foreign managers that you allocate clients’ money to?

A We get advice from Sumitomo Mitsui Asset Management, which has a team of professional analysts and investment managers and research staff. We act on their advice and order securities firms and banks to buy or sell foreign assets. We decide on the asset allocation strategy of each product.

Sumitomo Mitsui Asset Management advises us on lists of securities to be traded including overseas assets. We execute those trades according to those lists.

Q In your model portfolio, you have 22% in foreign equity and 33% in domestic equity. What about the rest?

A About 32% in domestic bonds, 11% in foreign bonds and 2% in cash.

We may raise the portion of foreign bonds to get returns from a weak yen. But at present I think that foreign stocks are a better choice.

Q What about alternative investments, such as hedge funds, private equity and real estate?

A In terms of our separate account business, we don’t invest in alternative investments.

Q How has your asset allocation changed over time, in view of Japan’s low interest rates?

A Gradually we have been putting more money into the stock market. In our typical portfolio at the end of November, domestic stocks represented about 35%, which is a 2 percentage point overweight on our basic annual asset allocation for domestic stocks.

But we have stayed constant during the year, and we have increased exposure to foreign stocks gradually to 22%, from around 21% early this year.

Q So your exposure to domestic stocks has stayed flat, even as the market has shot up. Do you expect to raise it at all?

A We are still positive on domestic stocks, but if the market shoots up further, we may reduce exposure in order to buy back on the dip.

Q So you have been increasing exposure to foreign equities. Where do you see opportunities?

A We had focused particularly on Southeast Asian countries. But this year, we have reduced exposure to Asian stocks, and are now more than 1% underweight our annual asset allocation plan.

Q Nikko Asset Management broke new ground when it sold its Gravity Americas Fund to Japanese investors, who do not have a history of investing in US equities. Are you raising exposure to US equity?

A This sale was not so surprising. US equities investment was very popular for Japanese investors. We had suffered currency losses due to the strong yen for many years, but Abenomics changed the currency trend to a weak yen. We are pleased to increase our exposure to foreign assets. We use the MSCI All Country World Index (ACWI) as a benchmark. So even when we think the US stock market is very attractive, the level of overweight is relatively small, at 1-5%.

Q Since you use MSCI ACWI, is your exposure to Asia relatively low?

A We want to get higher returns from higher-growth markets. We expect that one of those areas is Asia. As for our basic plan, our exposure to Asia is about 10% of [our allocation to] foreign stocks.

Q As your allocation to foreign equity grows, where are you allocating away from?

A We will reduce domestic fixed income.
Q Can you outline some of the other challenges you are facing?

A Pension plans have to focus on cash management more and more due to an excess cash outflow on the back of an ageing society.

Pension plans with cash inflow can be invested aggressively to pursue higher returns, but those with cash outflow have to be managed conservatively to maintain solvency. An investment manager should not only aim to achieve higher performance, but also show skill to meet clients’ risk tolerance.

Separately, because of the internet, people can access investment information more easily. They get the same information at the same time and generally have the same reaction. So we feel that finding market mispricing has become more difficult, while correlation among asset classes has become another problem for fund managers.

After aggressive quantitative easing policy across the world, higher interest rates may cause stock markets to decline. In this case, traditional diversified portfolios may not perform well without this diversification effect.

These are some of the challenges Japanese investment managers are faced with.