Japan’s corporate pension funds are not among the most aggressive in the region when it comes to diversifying investments. But there are exceptions, and one particular proponent of adding alternative assets into portfolios is Aisin Employees’ Pension Fund (Aisin).
The pension fund first began making investments into hedge funds in 2001. Today, 18 years later, Aisin has nearly 30% of its ¥205 billion ($1.9 billion) in assets under management invested in alternative asset classes.
The push to do so has been less an effort to outperform than to ensure a stability in returns, according to Hisashi Hatta former director of investments at Aisin, a fund managing the pension savings for employees at auto parts industrial manufacturer Aisin Group.
“As we have increased our alternatives investments, we have especially lowered our exposure to listed equity. It has given a lower performance for the portfolio, but we have instead gained a higher return stability,” Hatta told AsianInvestor at Aisin’s office in the city of Anjo, a suburb to Nagoya in Japan’s Aichi Prefecture.
Hatta knows what he’s talking about. He was the pension fund’s managing director and director of investments from 2010 to April this year, when he retired. However he remains a special adviser to the new head of the company's pension fund, Hiroshi Sumiya, until November this year.
He noted that when he took charge in 2010, Aisin and other corporate pension funds could sometimes boast annual returns of 4% to 5%. However, these investment returns depended on good capital market conditions; periods of volatility or dropping valuations sometimes left the funds struggling with poor performance.
Today, the typical corporate fund annual investment return target in Japan is closer to 2% a year. Aisin is a little more aggressive; it targets 2.33%, aiming to use the extra 33 basis points to cover all investment costs to ensure a clean 2% investment return for Aisin’s pension savers.
Hatta said Aisin has been pretty good at hitting this target, noting that the pension fund’s rolling return over the past 10 years has been above this basic target. Last year was an exception however, with Aisin reporting an annual return of 1.27% as the fund’s returns dipped amid generally poor equity markets towards the end of the year.
By way of comparison the Government Pension Investment Fund returned 1.52% during the 2018-2019 financial year, although this period included the stock market recovery of early this year.
DIVERSIFICATION NEED
For Hatta, last year’s equity losses underscores the importance of asset diversification. With equity markets are proving fickle, while debt markets are offering very little prospective returns, courtesy of Japan’s zero 10-year interest rate policy and low rates in Europe and the US too. This dilemma is proving a major headache for many Japanese institutional investors.
Aisin is seeking to solve this problem by shifting its approach to alternatives investing. The fund is particularly focused on adding government-backed infrastructure and real estate debt as it accumulates new asset inflows.
“The relatively high alternatives allocation [of the fund] means that we started looking at other risk factors such as our balance between private and public assets,” Hatta said. “We also have to make sure that although most of real assets investments are income-driven, they need to have strong underlying assets when these are not marked to market.”
The pension fund’s alternatives investment category includes hedge funds and insurance-linked investments. Hatta said about 8% of Aisin's AUM is in hedge funds, 5% to insurance-linked investments, 7% to infrastructure equity, 2% to domestic real estate equity, to 2% to overseas real estate equity, 2% to overall real estate debt and 2% to overall infrastructure debt (Aisin doesn't internally categorise the latter two as alternatives).The investment committee has so far excluded investments in private equity and direct lending.
Its current alternatives allocation is a result of strategic revisions of its investment risk profile every four or five years, the last of which was held in 2017.
YOUNG PROFILE
While Hatta is a fan of alternatives, he cautioned that large allocations might not suit all Japanese corporate pension funds. He noted that they work best in pension funds that have a relatively young composition, with working members contributing more money than it pays out in pension contributions.
The most recent figures for Aisin as of end-2018 show that close to 87% of its 66,000-plus members are still active in the workforce. This ensured the fund received contributions of $100 million during 2017 and 2018, while making $80 million in pay-outs. It’s a pretty healthy make-up given that industrial pension funds in Japan have to tackle with a combination of issues such as automatisation, outsourcing and a general aging demographics.
The maintenance of net inflows also ensures Aisin faces less pressure on keeping a pool of its assets liquid to ensure it can make pay-outs for pensioners. That in turn gives it room to invest more in illiquid assets such as infrastructure and real estate.
“The relatively big share of active members are a key factor for the fund to invest such a high share in alternative assets,” Hatta said.
He added that it's hard to ascertain how much pension funds with older memberships, and particularly those having to pay out more than they take in, should allocate to alternatives.
