International Equity Returns Distorted by Japan’s Bubble Economy

July 2, 2018
by Noriyuki Morimoto

The global economy has integrated into one, as companies increasingly became multinational or lost national identities. It is the time of global equities without borders. The asset category of international equities, which is based on the distinction between equities of one’s country and equities of others, is a thing of the past.


Nevertheless, until quite recently in Japan, international equities, not global equities, were the mainstream. Suppose during that time, a Japanese investor attempted to choose a management firm with which to invest in international equities (from a Japanese perspective). The investor would find that actually very few firms manage such assets. Neither do they have much experience in managing global equities. The useful information turns out to be management results of international equities, from a US perspective.


In the 1980s, when Japan went through the so-called bubble economy, how to treat Japanese equities was a tricky question for other countries. Especially with international equities from a US perspective, the weight of Japan had become overwhelming. At that time, many of the management firms were viewing Japanese equities as overpriced, so they probably had drastically reduced the percentage of Japanese equities in their portfolios compared to their actual weight.


When the bubble burst, because of the single factor of the weight of Japanese equities, many management firms ended up beating the market. So what value does this track record hold when assigning the management of international equities from a Japanese perspective, excluding Japan?


And suppose there is an asset management firm that operates globally: for Japanese clients, it manages international equities from a Japanese perspective, and for US clients, it manages international equities from a US perspective. In this case, it would be quite common that one beats the market while the other loses. For example, when the stock selection of US equities doesn’t go well, the results would differ significantly depending on whether those stocks are included in the portfolio.


Such odd situations in international equities would not occur with global equities. There is only one global category, so they can be compared consistently. Although this is a technical point, it is also one advantage of global equities.

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.