Atsushi Sawagami, a leading figure in investment trusts, talks about true long-term investment--

--Has the investment trust industry been affected by geopolitical factors such as pandemics and conflicts?

Atsuto Sawakami (SAWAKAMI): Basically, we can say that nothing has changed. Japanese investment trusts themselves are a large industry, with more than 6,000 publicly offered investment trust funds available for purchase.

This is only with regard to Japanese investment trusts, but in the Japanese investment trust industry, investment trust companies conduct investment trusts for the purpose of sales, so, to put it crudely, it hardly matters if there is a pandemic somewhere or a conflict somewhere.

--What exactly do you mean by ‘investment trusts for sale’?

SAWAKAMI: ‘Investment trusts for sale’ means that they are tools for major securities companies and banks to earn commissions. Many investment trust companies in Japan are subsidiaries of major securities firms and banks. And the parent companies, the major securities firms and banks, want to make more money from sales commissions than from long-term investment management.

The reason for this situation is that commissions are the main source of income for the major securities companies and banks. This means that they need their customers to trade frequently.

This is called turnover trading, and new products are needed to get customers to trade more frequently. This is why major securities firms and banks have their subsidiary mutual fund companies set up new mutual funds and sell them to earn commissions.

--Is this situation unique to Japan?

SAWAKAMI: The idea of investment trusts was originally created for ordinary people. Its origins date back to the Napoleonic Wars in 19th century Europe.

In the past, investment management was reserved for wealthy people. War widows and others received a lump sum from the state, and even if they wanted to invest it, the small lump sum was not individually handled by specialists like the wealthy. The idea of investment trusts is said to have emerged spontaneously there.

However, as explained earlier, in Japan it has become the exact opposite - a commission earner for major securities companies and banks.

Do what you need to do for the long term and the money will naturally follow.

The theory that ‘you don't deal with the market’ has been refined over more than 50 years of experience and achievements.

--In the stock market, there are stocks related to new technologies such as Web 3.0 and AI that are attracting attention, but what about investment trusts?

SAWAKAMI: Did you know that there is an old saying in the US stock market: ‘Don't befriend Mr Market’?

This means ‘don't chase market price fluctuations’, but as the current state of investment trusts in Japan is investment trusts for sale, major securities companies and banks have to create a topic of conversation. If there is a topic, it means there is a market there.

--Is it one of the investment tips to avoid getting involved in so-called fads?

SAWAKAMI: I think there are two types of investors in the world: those who aim for investment returns through long-term stock investment. The other is the dealer who targets instantaneous price movements and deals. Of course, I am a long-term investor, so I am the former.

I apologise for being a bit forward, but the Sawakami fund I founded about 24 years ago has been running at 6.1% per annum (as of November 2023). This may not seem like a significant figure, but in Japan, which has been stagnant due to a prolonged deflationary economy, we have achieved this level of performance.

Real investment takes time. I believe that if you take a long-term view and do what you need to do and don't do what you don't need to do, real investment will naturally follow.

Not playing the market is not just one of the tenets of mutual funds, but my own theory, honed over more than 50 years of experience and performance.

--Is there a possibility that products related to new technologies such as Web 3.0 and AI, which you mentioned earlier, will also be transient?

Sawakami: Yes, that's right. Web 3.0 and AI-related products may be in season now, but there is a possibility that they will soon go out of fashion. Markets are fads. And new funds are constantly being created to follow the trends.

The bigger issue that investors need to be concerned about, rather than worrying about fads, is that the so-called ‘zero interest rate’ policy of the government is coming to an end. When the ‘zero interest rate’ policy ends and interest rates come back, a lot of companies will disappear.

--Why will many companies disappear when the ‘zero interest rate’ policy ends?

SAWAKAMI: Currently, inflationary pressures are increasing globally and interest rates are rising. Meanwhile, it is clear that the domestic monetary easing policy has hit its head. This will eventually end deflation in Japan and interest rates will have to be raised.

Many companies have been spoiled by zero interest rates up to this point, and a rise in interest rates will make it unbearable for such companies. When they can no longer stand it, they will have no choice but to go out of business.

There is also the idea of ‘switching asset allocation’ in the financial world. Based on that idea, it is time for interest rates to go up.

Ironclad rules of investment management What is asset allocation switching?

--Can you tell us a little more about ‘switching asset allocation’?

SAWAKAMI: In the financial world, the principle of action works to a certain extent in light of economic ups and downs. When the economy slows down, companies lose their energy and are less willing to borrow funds. When this happens, governments and central banks try to boost the economy by introducing low interest rate policies.

This is the so-called income transfer from households to companies. What can be done in this situation is to invest in stocks. Under a low interest rate policy, there is no point in keeping money in savings accounts. This is called the time to invest in shares.

When the economy improves, share prices will rise in anticipation of this. As the economy rises, interest rates also rise, so you sell your holdings when interest rates have risen to a certain extent. Once you have cashed them in, you can now put them in a savings account to earn interest income. This is when you earn interest on your cash investments.

Next, if interest rates remain high, the economy will eventually stall and a recession will occur. When interest rates are high, bonds are sold more and more, so you buy bonds at a lower price. This is the time to buy bonds.

When the economy starts to deteriorate, this is the time to sell bonds, as governments and central banks introduce low interest rate policies. This is absolute, as interest rates and bond prices are inversely related.

Changing investment targets from equities to cash to bonds to equities in this way is called ‘switching asset allocation’ and is said to be an ironclad rule of investment management.

Switching asset allocation is also time diversification

This is a principle of behaviour in the financial world, also known as the ironclad rule of investment management. It is important to carry out this idea in long-term investment.

1.Switching asset allocation in the direction of anticipating major economic swings

2.Keep 100% in equities until the economy recovers from the recession and starts to heat up.

3.When interest rates rise considerably, sell stocks to lock in profits and earn interest on deposits.

4.When interest rates start to stall, withdraw from deposits and shift to bond investments.

5.As long as interest rates fall and the policy of low interest rates continues, earn gains on the price of bonds.

6.When the recessionary winds become considerably stronger, sell bonds and buy stocks that are being sold at a ragged price.

7.This series of ‘equity -> cash -> bond -> equity’ fund allocation switches are repeated in line with market conditions.

--What are your thoughts on the Japanese government's encouragement of its citizens to invest?

SAWAKAMI: Currently, the Japanese government is promoting a national ‘shift from savings to investment’, and I think this is certainly not a bad thing.

Interest on savings accounts, which used to be the mainstay of retirement savings, is low and hardly increasing at all, so I think it is a perfectly legitimate idea that if you have money to put into savings accounts, you should put it into investments. As a matter of fact, interest on savings accounts has been in free fall since the mid-1990s.

In other words, the truth is that investment has been necessary for 30 years.

--In general, investment trusts seem to be more complicated than stock investments.

SAWAKAMI: If you throw the word ‘investment’ at salarymen in the 1980s, they would probably say something nuanced like ‘I bet that's something people who like to gamble do’. This is because in the 1980s, due in part to the bubble economy, salarymen did not need to invest.

When savings accounts are not expected, pensions are insecure, the Japanese economy is not improving and salaries are not rising, the world has come to believe that the only way to build assets is to invest.

To be honest, even after 50 years in the investment management business, I am surprised at the change in people's impression of investment. I used to think that investment trusts were easier than investing in equities and that investment trusts were the first step in investing.

Going back to my original impression that investment trusts are more difficult than stock investments, I believe this is related to the fact that there are fewer ‘close’ examples of successful investment in Japan than in Europe and the US.

--Why are there so few success stories?

SAWAKAMI: This may be a bit old-fashioned, but in the Showa period (1926-1989), the mainstay of securities firms' business was turnover trading. Many of the employees of securities firms were therefore tasked with quotas, and in order to achieve them, they had to sell new products.

Customers, on the other hand, are forced to buy stocks and investment trusts and switch from one to another as these salespeople push them forward. Naturally, the customers do not make any money as they are charged a commission each time they switch. Only the brokerage firms and banks make money. The fact that actual investors do not make money is also a factor.

The basis of investment has always been to buy low and sell high.

--Is there anything you think people should be aware of?

SAWAKAMI: The most important thing I would like to say to people who are going to start investing is that it is better to start slowly and not rush. It is clear from the fact that economies are not growing that the direction taken mainly in developed countries - that if interest rates are set at zero and money is spread around, the economy will grow - was a mistake.

It has only made money for a few and increased the number of people on low incomes. On the contrary, global inflationary pressures will eventually force interest rates to rise. If the reality of Japan's investment trust companies is taken into account there, my prediction is that the investment products that have ridden the stock market boom in the ‘zero-interest-rate’ era will have a wobbly performance.

Even after many investment trust funds have collapsed, you will always find a fund that survives. My advice is to start the new NISA slowly at that stage.

--Has there ever been a major market crash in the near future, as you describe it?

SAWAKAMI: The Lehman Shock was said to be a once-in-a-century crisis, but I have been in the industry for 50 years, so I can tell you that the Black Monday of October 1987 was a terrible time, and the oil crisis before that was even worse. It took 19 years for the US economy to officially declare economic recovery, since it was August 1992.

I think the situation will probably be similar to this when we are forced to raise interest rates.

--What is important if such a situation arises?

SAWAKAMI: The important thing is that people have to live even if the stock market crashes. People's lives will not disappear. What will be affected by a stock market crash are the investors who have taken advantage of the monetary easing bubble. In other words, the financial economy, which has swelled dozens of times, will collapse, but the real economy will continue no matter what happens.

Real investment, which I have developed in my long experience, means careful investment based on the real economy. I think investment is a good thing and I am not against governments encouraging investment. But I would like to tell them that now is not the right time.

-- In other words, make long-term investments that are rooted in the real economy.

SAWAKAMI: As I explained in switching asset allocation. Changing investment targets in anticipation of economic and interest rate trends is a rational principle of action in long-term investment, as it is also time diversification. In the very near future, many of the mutual fund funds that have danced in the global monetary easing bubble will disappear.

It is not too late to start investing then. The basic principle of investing has always been to buy low and sell high. I don't think now is the time to rush into anything.

Book Review

This is the standard of investment: a must-read for people in their 20s and 30s! Long-term investment mentality to survive the inflationary era'.

Many people start investing because they are worried about their retirement, but fail. What is needed for asset building is a ‘long-term investment mentality’. Atsuto Sawakami, a charismatic figure in Japanese long-term investment, explains the correct understanding and how to acquire it in an easy-to-understand manner.

Atsuto Sawakami (Author) Kawade Shobo Shinsha (2023/9/21)

The once-in-40-years great opportunity is coming’.

A book featuring a dialogue between Atsuto Sawakami, founder of the Sawakami Fund, and Seiji Watanabe of Kounden Keizai Juku. The two investment giants engage in heated debate on the coming crash, individual stock investment, long-term investment, the crash of Japanese government bonds and more.

Atsuto Sawakami (Author), Seiji Watanabe (Author) Kaya Shobo (27 Feb 2023)

Profile.

Atsuto Sawakami

Founder and CEO of Sawakami Holdings and founder of Sawakami Investment Trust, Atsuto Sawakami was an analyst and fund advisor at Swiss Capital International from 1971 to 1974, and was head of Pictet Japan from 1979 to 1996, before founding Sawakami Investment Management (now Sawakami Asset Management) in 1996. Investment Trust) in 1996. With net assets of approximately 350 billion yen and more than 117,000 clients, the company has gained support as a pioneer of long-term investment in Japan.

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