Japan corporate pensions revamping allocations

Japanese defined-benefit schemes are showing a growing hunger for global and alternative investments, a JP Morgan Asset Management poll shows.
Japan corporate pensions revamping allocations

Japanese pension funds are changing their asset allocation frameworks as they cast a wider net in search of better returns, a survey showed on Monday.

The survey by JP Morgan Asset Management polled 120 of the country's corporate defined-benefit  (DB) and three mutual aid pension funds between early March and mid-June.

It noted that 20% of pension funds have abolished domestic bond and equity categories in favour of global bond and equity categories in their allocation models, reflecting an increased emphasis on international diversification and the diminishing investment opportunities at home.

Exposure to domestic assets is generally falling at the expense of greater allocation to foreign assets, said Akira Kunikyo, an investment specialist at JP Morgan Asset Management. 

At 21.7% on average, Japanese DB pension fund exposure to domestic bonds is now at its lowest level since the annual survey was first launched in 2008, which is hardly surprising when 10-year Japanese government bonds are yielding just 0.04%.

Allocations to domestic equities also eased to an average of 7.2% from 7.4% the year before, according to the survey.

Japanese shares tend to be more volatile than global equities, Kinikyo said. “This is partly explained by [the] higher cyclical exposure, such as automobiles and capital goods, in Japanese equities. Japanese corporate pensions normally take long-term historical volatility into consideration, rather than looking at it on a one-year basis,” he told AsianInvestor.

Kinikyo added that he expects allocations to domestic equities to continue sliding.

Japan DB funds' allocations
(Source: JP Morgan AM; click for full view)

The shift towards more global investment portfolios is also partly reflected in the investment behaviour of the Government Pension Investment Fund, the world’s biggest pension fund, which released its annual results summary on July 6.

Foreign assets (equities and bonds) at the pension fund climbed to 38.65% of its total $1.4 trillion investment portfolio at the end of March from 36.15% 12 months earlier.

Its allocation to domestic bonds over the same period fell to 27.50% of the portfolio from 31.68%. That said, its allocation to domestic equities edged up to 25.14% from 23.28% of the total as appetite for riskier assets, generally, improved, GPIF said.

Indeed GPIF has led the way in deciding to overhaul its allocation framework several yeras ago -- one reason it won an award from AsianInvestor in 2015.

More recently the outlook for global – and Asian – equities has clouded as fears of an escalating trade war between the US and China has threatened to crimp global growth and corporate earnings. Valuation concerns have also grown after the strong surge in global stock markets seen in 2017.

That could yet lead to some unease among DB pension funds, especially those that have upped their foreign market allocations but are relatively under-resourced – as Japan’s Financial Services Authority has noted some corporate pension funds lack the personnel needed for investment management.

“The markets may swing and the consciousness of market risk may increase,” acknowledged a Japan-based independent consultant with pension fund clients, who declined to be named.


The JPMAM survey also noted that Japanese pension funds are increasingly adopting asset-allocation strategies based on "role-based" or factor-based approaches.

For example, some pension funds have begun categorising assets based on their risk level within the portfolio, with a 60:40 split between ‘base assets’ generating steady income and ‘growth assets’ seeking higher returns.

Others are redesigning asset allocation on role-based categories, such as assets intended to help meet liabilities, cover payments or provide long-term growth, the survey showed.

About 41% of the DB funds have already adopted new or altered portfolio management frameworks, the survey said.

All these changes are being spurred by the desire to generate sufficient returns in an ultra-low interest rate environment so pension funds best meet their obligations.

The expected returns among corporate pension funds have tumbled from 3.5% to 2.6% over the past decade, reflecting the downward pressure on domestic interest rates, the JPMAM survey noted.

Much of the drive to generate higher returns is also pushing allocations towards alternatives. The average Japanese pension fund now allocates 17.1% of its portfolio to alternative investments, a record high that has climbed rapidly from just 11.4% in 2013, according to JPMAM.

A clear majority (59.2%) of the DB funds surveyed indicated that they intend to continue increasing their allocations to alternatives next year, the survey said.

And that in turn looks likely to boost Japanese institutions to invest more abroad. 

“Alternatives allocations appear to be tilted towards overseas to some extent," Kunikyo said, noting how the local alternatives market included real estate, private equity and unlisted REITs , "Other strategies such as hedge funds and unconstrained are all overseas.”

He added that such strategies appealed to Japanese DB funds as they tend to provide return enhancement and mitigate volatility at the same time. 

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