Alternative asset classes are making headlines again as a century-old Japanese bank overhauls its strategy to respond to market conditions.
The global spike in interest rates has led to bond rate declines, in and amongst wider market shrinkages. In this context, low-correlation assets are crucial to maintaining the performance of a portfolio, even for a regional bank with high liquidity spurring many to look to invest in alternative assets
Yamaguchi Financial Group Inc., whose $7.3 billion portfolio dwarfs its market value, has reduced its bond holdings in response to the rapidity of market fluctuations.
Now, it seeks to invest in low-correlation, high-yield assets such as private REITs and corporate bonds issued by both Japanese and overseas corporations. It is also searching for private equity and dividend-paying stocks.
Chief Executive Officer Keisuke Mukunashi stated in an interview that investment in alternative assets is required to diversify and enjoy stable profits less susceptible to market fluctuations.
Historically, Yamaguchi mostly took interest rate and stock risks, but this is no longer a sound strategy in a high-inflation landscape.
In a letter to clients dated October 19, SMBC Nikko Securities analyst Masahiko Sato stated that foreign bond holdings pose the greatest threat to regional bank earnings this year.
Sato believes that unrealized losses on foreign bonds have intensified, and explained that there has been a rapid increase in bonds with negative spreads as a result of rising foreign currency funding costs.
With its updated strategy focussing more heavily on alternative assets, Yamaguchi intends to nearly double its managed assets within three years.
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