Discussing Asset Allocation, Active vs. Passive and Japan
Last week on our podcast, I had the opportunity to speak with Bill Stone, the global chief investment strategist for PNC Asset Management, and Jesper Koll, CEO of WisdomTree Japan. Our discussion focused on markets, Fed policy and building global portfolios, with a particular focus on Japan in the second half of the conversation with Jesper.
- With Stone, we talked about how his asset allocation strategy at PNC Asset Management is to carve up active/passive/factor portfolios using a roughly one-third allocation to each as a way of targeting equity exposure. Within the active group, he’s looking for high-conviction managers who can add value and pairing them with factor approaches and pure beta in a way that minimizes tracking error from benchmarks. His factor approach tries to tilt to rewarded factors such as value investing and quality investing.
- In today’s market environment, Stone’s team is favoring value-oriented strategies, in part due to a belief the financial sector run-up has room to go with a steep yield curve.
- Stone’s team has even been looking at factor strategies applied to the alternatives market. We discussed various alternatives such as commodities and managed futures, and why Stone’s team is moving from pure commodities exposures to managed futures that incorporate a trend element for commodities.
On Japan, Jesper discussed:
- For monetary policy, the Bank of Japan (BOJ) has been sticking with its zero interest rate cap all the way down to the 10-year maturity on its yield curve, and the BOJ is going to remain steadfast in this policy. We saw this divergence in policies recently with a global yield pickup led out of Europe, but 10-year Japanese bond yields stayed at just 10 basis points (bps).
- Jesper believes the policy is working. He sees bank credit growth accelerating. Last year bank lending growth was running at 2% to 2.25%, while this year Jesper sees it growing at 3.25% to 3.5%. He sees the banks as strong, well-capitalized and ready to lend with a pickup in demand for credit.
- Japanese prime minister Shinzo Abe’s popularity is declining. Jesper attributes this decline to Abe’s desire to make changes to the Japanese constitution and not to his economic policy decisions. We expect to see a change in his cabinet in the coming few weeks and a renewed focus on the economics side. Jesper is confident the team around Abe sees this as a wake-up call for new initiatives on deregulation and privatization.
- Japanese banks benefiting from being the largest lender outside China into countries in the Association of South East Asian Nations.
- Jesper talked about the performance of Japanese small caps versus large caps as one sign of the endogenous demand happening in the local economy—over the last five years, Japanese small caps have been beating large caps by over 5 percentage points per year, which translates to very large gains over large caps. Jesper believes Japan is in a demographic sweet spot because purchasing powers and income are growing. The quality of jobs is improving with a move toward full-time jobs and wage growth. Starting salaries for university graduates increased around 6% this year, while total wage growth was 1.5%. This does not sound like a lot, but after decades of declining wage growth, this is a big deal. And it’s concentrated in the younger population.
It was a pleasure talking to both Bill Stone and Jesper Koll, and we thank them for participating. To listen to the full broadcast, you can click below.
Important Risks Related to this Article
Investments focused in Japan increase the impact of events and developments associated with the region, which can adversely affect performance.
Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.