SuMi TRUST: What about those bear funds?
At the end of October 2023, Sumitomo Mitsui Trust Holdings (SuMi TRUST) slashed its net income forecast for FY2023 by 57.5%, JPY 200bn to JPY 85bn, on the realization of hedging losses on “bear funds”. Like the mega banks, SuMi TRUST reported fiscal first quarter earnings last week, just before the worst three-day streak in the Japanese stock market since 1950. Let’s just say, those bear funds would have come in handy.
So let us step back to October 2023. SuMi TRUST had been reducing strategic shareholdings through dialogue with their clients in line with their policy of, in principle, not holding any shares as a conventional stable shareholder. Considering that this reduction was to be executed over several years (in fact, several three-year Medium-Term Business Plans), SuMi TRUST was (and still is, in part) hedging their exposure with Japanese equity bear type mutual funds in order to curb the impact of stock price fluctuations on capital. As a reference at the end of October 2023, the Nikkei stood and just under 32,000, slightly above the low it reached this past Monday.
When these hedges were put on, the Nikkei was presumably at the upper end of its long-term trading range, and structural changes, such as the TSE-initiated corporate governance reform of Japanese corporates with an awareness of the capital cost, were not yet taking shape. In addition, the change in Bank of Japan leadership with Ueda-san’s mission to normalize monetary policy and end deflation, which has lasted for 30 years since the burst of the bubble economy, was not yet on the horizon.
Hence the environment had changed significantly (you may also add an US-led AI-driven stock market bull run and other factors to the mix), and arguably the hedging approach should have been re-evaluated, especially since under SuMi TRUST’s accounting treatment, strategic shareholdings and bear funds are valued individually.
Fast forward to last week’s earnings report. During the first quarter of FY2024, SuMi TRUST continued to accelerate the initiative to reduce strategic shareholdings and JPY 10.4bn at cost basis. The gain on these sales of strategic shareholdings was JPY 16.9bn, partially offset by realized losses from the sale of bear funds of JPY (4.5)bn. SuMi TRUST gives the hedge ratio as of the end of June as approximately 30%.
SuMi TRUST still had JPY 406bn in strategic shareholdings at cost basis at the end of the first fiscal quarter (JPY 433bn including some net gains), so accordingly the level of bear funds would have been approximately JPY 120–130bn.
If somehow they were able to close out even some of these hedges at market lows on Monday, it would have been a good trade — highly unlikely, as this is governed by their investment policy and not a trading position (although, as per the above graph, some trading takes place). So we will have to wait another three months for the next earnings release….
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