A depreciating yen, low fixed income returns available onshore and an aging population have taken a toll on the country's asset owners in AsianInvestor’s latest AI300 survey, most particularly its insurers.

Poor debt returns in particular are leading more to seek to build positions in alternative investments. 

Institutional investors from the country were once again the second largest country grouping by assets under management (AUM) in the survey, which ranks the leading 300 regional investors by assets. All-told, 53 investors from the country accounted for 26.3% of total assets, a drop from 2017 when they had boasted 29.1% of total assets.

Nearly 70% of asset owners saw their AUM decrease compared to the previous year, and over half of that number were insurance companies. This fall took place despite soaring domestic and global equity markets in 2017 that saw the Nikkei 225 index grow by 23.7% between September 2016 and September 2017, the time period covered by the AI300 for Japanese insurers.

Collectively, Japan's insurers saw their AUM decrease by about 6% in 2017, or a $207.1 billion drop, after enjoying a modest 1.6% growth in 2016. The fall of insurer assets accounted for about 95% of the total Japanese AUM decrease of $218.5 billion.

While insurers were the worst affected, every category of asset owner in Japan except for pension funds and the central bank experienced a decline in AUM. In truth pension funds would also have registered a drop in AUM were it not for the 6.5% AUM growth of the massive Government Pension Investment Fund (GPIF), the largest pension fund in Asia-Pacific.

Despite the slow decline, investors from the country remain a powerful force in Asia. Their combined $10.5 trillion in assets sat only behind the $16.5 trillion of AUM possessed by Chinese asset owners.

FALLING YEN AND DOMESTIC STOCKS

In part the drop in AUM among many Japanese asset owners was down to foreign exchange changes. The yen experienced an 11.5% depreciation versus the dollar over the October 2016 to September 2017 same time period.

This served to reverse many investors’ AUM gains on a converted basis, but had little material impact for investors that operate in yen.

Dai-Ichi Life Insurance, for example, increased its AUM by 3.2% to ¥31.4 trillion in 2017. However, when converted to the dollar, its total fell, from $300.3 billion to $278.1 billion. GPIF also saw its total AUM amount affected, though its 18.7% growth rate on a yen basis was large enough to sustain positive AUM growth.

Currency depreciation aside, the 35-ranked Dai-Ichi Life Insurance and the GPIF both saw strong returns in domestic equities, countering the meagre performance of fixed income.

“Market price yield of marketable securities in 2017 resulted in the highest result of 12.1% in domestic stocks,” a Dai-Ichi spokesman said.

However, low yields in fixed income products remain a concern. GPIF said foreign corporate bonds returned only 1.33%, while domestic bonds offered even less. “The best performer [for us] was domestic equities, the worst performer was domestic bonds, but it still earned 0.8%,” said a spokeswoman for the pension fund.

Its allocations to domestic equities and domestic bonds was respectively 25.1% and 27.5% in 2017, but chief investment officer Hiromichi Mizuno said in March that GPIF is prioritising investment objectives that focus more on addressing long term capital market risk over immediate investment returns.

ALTERNATIVES INVESTMENTS

For Japanese asset owners, a combination of ultra-low local interest rates vie with the potential for a US economic slowdown for the biggest ongoing concern.

The Dai-Ichi spokesman said the insurer is looking into increase its exposure to alternative asset classes in response to these concerns. “We will continue expanding exposure to fields that are less correlated with traditional assets, such as infrastructure and real assets,” he noted.

Dai-Ichi’s allocation to real estate stood at 3.1% as of the end of 2017.

The insurer is not alone in wanting to grow its exposure to alternative assets. GPIF announced its first infrastructure mandate in January, after issuing a request for proposal for alternative assets in April 2017.

Japan Post Bank, which ranks eighth in the AI300, also said in May that it planned to allocate about $62 billion into alternative investments, and Manulife Life Insurance said in April that it would invest about $2.5 billion into pan-Asia real estate.

A July survey of Japanese corporate pension funds also showed that the average one now allocates 17.1% of its portfolio to alternatives, from 11.4% in 2013. Further, 59.2% said they would continue increasing their allocations to alternatives over the next year.