As Brett Gallagher drifted in and out of sleep in front of the TV in his hotel room on March 11, 2011, he vaguely remembered hearing something about Japan and an earthquake and tsunami.
The next day, as he watched his sons play baseball at the IMG Academy in Bradenton, Fla., where he was visiting for the weekend, the discussion in the bleachers confirmed it. The 9.0-magnitude quake struck the northeast coast of Japan’s main island at 2:46 p.m. local time. It lasted just six minutes, but the devastation from the earthquake and ensuing tsunami was extensive.
“At first, you’re just trying to take it all in because you’ve really never seen anything quite like that,” Gallagher remembers. He then contacted one of his colleagues whose family lives in Osaka; fortunately, the family was travelling in Peru.
Over the course of the weekend, Gallagher turned his thoughts to Artio’s institutional investor clients. “We didn’t really face the issue of investor clients with significant assets in Japan,” he says, noting that nearly all are North American-based corporations, foundations and endowments. He adds, however, that some investors were trying to determine if there were opportunities relating to the collapsed Japanese market.
“As we talked to other managers, there were a lot of people managing pension plans who were debating whether to jump into Japan. But we were unaware of any Artio clients that were looking to make any strategic long-term changes at that time,” says Gallagher, particularly since Japan faces significant challenges.
Japan’s debt, relative to the size of its economy, is the largest in the industrialized world (230% of its GDP, according to an International Monetary Fund report). Yet the Japanese will have to finance most of the rebuilding stemming from the damage. “That may put upward pressure on interest rates in Japan, while, at the same time, the government will have to raise tax rates and/or cut spending, which will also have an effect of further slowing the economy.” And with little immigration, Japan’s population is declining, making it difficult for domestically focused companies within the country. “A smaller population means fewer sales every year,” he says.
Is there any kind of contingency plan for institutional investors to insulate their plans from disasters? In his 20-odd years of investing, Gallagher has discovered that “unpredictable events occur with some regularity.” He points to the Japan earthquake or the U.S. invasion of Iraq as examples. While anyone would have had difficulty predicting either of these events, he says “market-moving events” such as these occur about every three years.
“While you can’t necessarily insulate yourself from the specific event, you do have to have a portfolio that’s diverse enough,” he stresses. This means tangible assets, materials and energy stocks or high-yield debt—and diversification within those assets.
Of course, portfolio damage can’t compare to the human damage from such devastation. Humanitarian organizations, companies and individuals continue to donate and support relief efforts. To make your donation, go to redcross.ca.
Brooke Smith is managing editor of Benefits Canada. brooke.smith@rci.rogers.com