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After Mercari – Japanese asset managers see new era in venture capital investing

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By Tomo Uetake

TOKYO (Reuters) – The hugely successful IPO by online marketplace Mercari in June was a bonanza for its shareholders – and may transform lukewarm attitudes among mainstream asset managers about investing in startups, according to major Japanese institutional investors and industry officials.

Mercari <4385.T> became Japan’s first home-grown unicorn, with a pre-IPO valuation of more than a billion dollars in early 2016. Its value increased further and led to rich rewards for early backers who had invested in the firm either directly or through venture capital (VC) funds. The stock soared on its Tokyo market debut on June 19, doubling at one point.

“Venture capital used to be the ‘ugly duckling’ of private equity in Japan. Now we are seeing way more interest from institutional investors,” said James Riley, head of startup accelerator 500 Startups Japan. “Thanks to Mercari for making a big splash noticeable on a global scale.”

The large gains recorded by Mercari, which operates a popular smartphone app that allows people to trade used items online, should encourage more institutional players to look to domestic startups and other firms at an early stage of their development as a viable investment option despite the risks, especially given razor-thin returns on domestic bonds.

“Not only VCs but also other institutional people took part in Mercari’s late stage pre-IPO fundraising rounds. It was a big success for them,” said Soichi Kariyazono, chairman of the Japan Venture Capital Association (JVCA), referring to the unicorn’s debut on Tokyo’s Mothers market.

Its pre-IPO shareholders included Development Bank of Japan and Japan Post Capital. Neither will talk about how much they still own.

“When many institutional investors have a target annual return of 4 percent or so, Mercari’s late-stage investors had their funds more than double in just 1-2 years,” added Kariyazono.

In addition, its pre-IPO backers – through money they had in VC funds – included wider institutional investors, from insurance companies and banks to domestic pension funds, said Shinichi Takamiya, partner at Globis Capital Partners. He declined to name them citing confidentiality agreements.

Takamiya said Mercari was a potential game changer in Japan’s nascent venture industry, with “before-Mercari” and “after-Mercari” buzz phrases.   

Among the other recent unicorns was MTG <7806.T>, a manufacturer of beauty and workout products. It became the second Japanese unicorn to go public as the firm’s value soared above $1 billion shortly before its IPO last month.

And one of the next could be Sansan, a company that offers an app for managing business cards or business contacts. It has been attracting increasing interest from venture capitalists and other investors and its value has been growing.

In the pre-Mercari era, because Japanese startups were too small to attract big players, Japanese investors interested in the sector mostly looked to foreign ventures, primarily those in Silicon Valley.

GATEWAY TO PARTNERSHIPS

Nippon Life, a prominent Japanese investor in VC, had invested 60 billion yen ($540 million) in venture capital assets as of March 31, with half of that amount invested in domestic startups. The firm says it intends to increase its VC allocation but cannot say by how much.

In recent years, the insurer has wanted to increase its VC investments as it represents a fraction of its total assets of 66 trillion yen, but it has been difficult in practice because of the limited size of the domestic market, said chief investment officer Kazuhide Toda.

Nippon Life now sees venture capital not just as an investing route but also a gateway to finding possible partners in technology sectors it is keen on developing, such as FinTech or InsurTech – the use of the latest technology to transform the banking and insurance sectors.

“We plan to increase our exposure to venture capital assets, both domestic and foreign. We are keen to find opportunities that are attractive not only in terms of return but also help our core businesses,” said Toda. The Government Pension Investment Fund (GPIF), the world’s largest pension fund, is also looking to start investment in the domestic VC market, its officials said.

The Pension Fund Association of Japan, another big pension fund which manages 12 trillion yen on behalf of corporate pension funds, says it has invested in the sector for 4-5 years and plans to seek further opportunities.

“Japan’s startup ecosystem is evolving, with more institutional players participating in late-stage pre-IPO funding rounds,” said Shuzo Takahashi, head of private equity at the PFA. “We welcome it as a much-needed development to the industry.”

Their stance could lead smaller institutional investors to follow suit.

Rheos Capital Works’ president Hideto Fujino, a well-known fund manager whose Hifumi Fund <LP62006808> is the largest among all Japanese stock toshin funds, told Reuters he was considering starting a venture capital arm.

Even the Japanese government is stepping up support. The Ministry of Economy, Trade and Industry (METI) launched the “J-Startup” project in June as it seeks to breed 20 unicorns by 2023.

(Reporting By Tomo Uetake; Editing by Martin Howell)

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Rebalancing: A simple, if unappreciated, way to enhance investing

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The bull market in stocks has been running for nearly eight and a half years — one of the longest upward stretches ever. Have you rebalanced your portfolio lately?

You might want to think about rebalancing to lower your risk and possibly improve performance. This buy-low, sell-high approach can help you stick to a plan and overcome harmful psychological tendencies.

Yes, psychological. Rebalancing can be an effective way to deal with greed, fear and indecision.

“Consistent rebalancing is a reliable, and often underappreciated, source of higher risk-adjusted performance for the patient investor,” wrote Brent Leadbetter and two colleagues at investment firm Research Affiliates in a recent report.

It can help investors overcome the natural tendency to wait and see before tweaking their investment mix.

How rebalancing works

It’s a fairly simple concept: With rebalancing, you occasionally want to cash in some profits on high-flying stocks or other assets, then reinvest the proceeds in laggards. The idea is to bring your overall portfolio back in line with a suitable long-term mix that’s suitable for you. Rebalancing assumes you have a target mix of stocks, bonds, cash and other investments and want to stick with it.

Suppose you earlier decided that a split of 60 percent stocks/stock funds and 40 percent bonds/bond funds is a good mix. If you’re currently sitting at 65 percent/35 percent, for example, you might want to pull assets equal to five percentage points from stocks and reinvest them in bonds, to get back to that 60/40 position.

Stock prices have tripled since the long bull market began in March 2009. Consequently, you might have a bit too much in stocks, especially as you’re older now and presumably want a less-volatile portfolio.

“The biggest advantage of rebalancing is that it helps you manage risk,” said David Fernandez, a certified financial planner at Wealth Engineering in Scottsdale. “The U.S. stock market has done so well lately that, if you’re not rebalancing, you’ll wind up with a portfolio that’s heavily concentrated in (large) U.S. stocks.”

Behavioral issues

A less-obvious aspect to rebalancing is that it can help investors overcome psychological tendencies that can prove harmful.

Greed is one. As explained by the Research Affiliates report, when investors are sitting on large paper profits in the stock market, they could become susceptible to the “house money” effect. This explains the tendency of casino gamblers on a winning streak to stay too long at the table. So too with many stock-market investors.

Fear of missing out is another. Many of us tend to remain heavily invested in stocks even when it becomes more risky to do so, out of fear that our friends will keep bragging about all the money they’re making if the market keeps rising.

People are “evolutionary wired to follow the herd,” said the Research Affiliates report. That is, nobody wants to feel stupid, or even ostracized, by missing out on big gains.

These behaviors are easier to overcome if we stick to a plan. Rebalancing provides a discipline for taking such actions even when they don’t feel right.

Conversely, rebalancing also provides the justification for keeping at least a toehold in the stock market at all times. It can help you view bear markets not as cycles to be feared but as buying opportunities.

Betting on long-term averages

Still, it can be difficult emotionally to take some chips off the table during a market environment like that of the past eight-plus years, when the gains have rolled in fairly steadily. There’s a natural tendency not to want to sell winners prematurely.

However, rebalancing isn’t the same as market timing, which involves making big shifts into or out of the stock market, usually based on recent trading patterns, valuations or other news or developments. With rebalancing, the changes are more subtle, and they’re focused on getting back to a predetermined allocation or mix.

Rebalancing also involves moving among different investment subcategories. Foreign markets haven’t fared nearly as well as U.S. stocks in recent years and thus could be a good place to move some money, Fernandez noted.

Rebalancing rests on another assumption — that investment returns will tend to fluctuate more or less in line with their long-term averages. This is the concept of “reverting to the mean.” While individual stock prices can fluctuate wildly, the market as a whole has returned about 11 percent annually over time. After a big rally, stocks tend to cool off for a while. After a slump, they tend to recover. 

“A disciplined rebalancing approach continually positions our portfolios to reduce risk,” said Research Affiliates.

In fact, investors who rebalance don’t necessarily give up all that much in gains, even when the market is advancing. For example, the all-stock Standard & Poor’s 500 index generated an average gain of 7.2 percent annually over the 20 years through 2017, noted JPMorgan Asset Management. A 60 percent/40 percent stock-bond split didn’t do all that much worse, returning 6.4 percent a year, but with less risk.

Tips for success

Rebalancing is a simple concept, but there are ways to make it more effective. Here are some tips on that:

  • Rebalancing works best inside Individual Retirement Accounts, 401(k) plans and other accounts where buy/sell decisions don’t trigger taxable gains or losses. If rebalancing would exert a tax impact or result in big trading costs, you might want to rebalance less frequently.
  • You don’t need to rebalance all that often. Many advisers suggest doing so about once a year or after your portfolio has drifted out of whack by maybe five percentage points.
  • Rather than selling assets to rebalance, an alternative would be to earmark new investment dollars or reinvested dividends into stocks or bonds that have lagged.
  • Rebalancing doesn’t work as well with individual stocks or bonds, which conceivably could lose all their value. You want to use broadly diversified funds.

As noted, the flip side to rebalancing is that it can slow your gains during periods of sustained rising prices. But after more than eight years of a mostly upward trend, the odds are increasing for a major, downward shift in direction.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

READ MORE:

  • Don’t know what to do with your 401(k) plan? Consider moving it to an IRA
  • Here’s what economic growth means for your investments
  • Keys to better investing may be hiding in your tax return

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'Am I on a suckers' list after investing £1862 in carbon credits?'

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  1. ‘Am I on a suckers’ list after investing £1862 in carbon credits?’  Telegraph.co.uk
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Investing: It's not that difficult to get the big things right

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  1. Investing: It’s not that difficult to get the big things right  The Guardian
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