Despite the meagre returns on Japanese assets in recent years, domestic pension funds have avoided investing more abroad due to the wall of foreign money seeking the safe haven of the yen and driving it ever higher. But that may well change.
For one thing, new prime minister Shinzo Abe is striving to weaken the currency. And if more of the total ¥285 trillion ($3.08 trillion) in retirement capital does move offshore (only 20% of it is overseas now), that will benefit foreign asset managers, notes the Japan Pensions Industry Database (JPID, www.ijapicap.com).
In June 2007, the yen was at ¥122.68 to the dollar, but for much of 2011 and 2012 it was below ¥80, an appreciation in five years of almost 50%. Gains of this size, at a time when markets elsewhere were in the doldrums, would have eaten up the earnings available on all but the riskiest of foreign-currency assets, notes the JPID.
The yen stood at around ¥90/dollar as of the start of this week, and the government has hinted it wants to see it fall to ¥100.
Another factor that may urge pension money offshore is a new accounting rule for corporate retirement schemes that takes effect from April 1.
Today private and public sector pension executives are making decisions about how their portfolios will be allocated throughout the year starting April 1. But this time, those in charge of corporate schemes will be making decisions knowing that if their assets and liabilities are not equal by year-end, the gap will need to be filled right away from the P&L. In the past, underfunding could be made good over several years.
Tokyo-resident asset managers certainly expect to see substantially more pension flows into foreign assets, according to the Nomura Research Institute’s recent annual report on the sector.
This may be a safe bet, given that Japan's Government Pension Investment Fund – the biggest single retirement pot in the world, at $1.4 trillion – handed out its first EM equity mandates in June last year.
Some 70% of foreign-owned firms polled by NRI said investment in emerging-market bonds, EM equities, foreign bonds and hedge funds would increase by more than 10% annually in the next three to five years.
Japanese firms broadly concurred with this judgment, to a lesser degree, with around 40% saying foreign bond investment would grow by 10% per year.
The views of overseas and domestic firms were closer on foreign equity investment, with 50% and just over 40%, respectively, saying such holdings would expand by more than 10% a year.
Whatever the details are, this represents a huge opportunity for foreign-owned investment firms, notes the JPID. Neither domestic asset managers nor local trust banks and life assurance companies have expertise in overseas markets.
They are well aware of this weakness and have recently been “extra-active” in seeking out sub-advisers to help them provide a full suite of products, according to the JPID. Investment trust companies – which offer mutual funds and require a separate licence under Japanese law – now have 70% of their assets managed this way.
Resident foreign firms already do a lot of directly mandated and indirect sub-advisory work for both corporate and civil-service pension funds (see ‘rankings’ tab at www.ijapicap.com for the top 25). Non-residents have also been successful in winning sub-advisory business.