Japan pensions seen building exposure to illiquid assets

The country's corporate pension funds have traditionally favoured hedge funds in the alternative space but this is expected to change as they ramp up exposure to private markets.
Japan pensions seen building exposure to illiquid assets

Corporate pension funds in Japan are increasingly shifting from investing in hedge funds to other illiquid assets as they further diversify their portfolios and look for higher returns, according to market experts.

These institutions invest about 10%-15% of their assets under management (AUM) in alternatives, including hedge funds, and that could increase in the next three years to between 15% and 20%, Tomohiro Kumura, director of investments for Japan at Willis Towers Watson, told AsianInvestor.

Historically, among the different types of alternatives assets, corporate pension funds in Japan have tended to invest in hedge funds. But they are now trying to gain more exposure to real estate, infrastructure and private equity, he said.

Katsuyuki Tokushima, head of pension research at NLI Research Institute, holds similar views. He projected that in three years, corporate pension allocations to alternatives, including hedge funds, will increase from the current estimated level of 10% to 15%. They are gradually investing more into real estate, infrastructure and private equity funds, given heavy downside risks in hedge fund strategies, Tokushima added.

Katsuyuki Tokushima,
NLI Research Institute


However, each corporate pension's allocation to hedge funds and other alternatives will depend on their risk and return appetite, he said, adding that they on average allocate around 5% into hedge funds and 5% into other alternatives.

Pension funds in Japan have suffered from very low yields, and gradually they have been shifting their investments into riskier assets. The pandemic has prompted them to think about their future investments and what kind of diversified portfolio they would like and how they should achieve it, said Kumara.


Some corporate pension funds that have not started any alternative investments for various reasons may not change their mindset. But those that have already invested in alternatives will keep investing to increase their returns and diversify their portfolios, he said.

In the search for yield, some have even ventured into more high-risk credit type of strategies. High-yield and private debt are very popular in Japan, Kumura said. According to Takayuki Fujimoto, head of the institutional sales department at Nikko Asset Management, there are also pension funds that are considering investing in risk-hedged multi-asset strategies as they prepare for a potentially deeper economic downturn. These funds have struggled with low yields from their fixed income strategies, he said.

Corporate pension funds in Japan have an estimated aggregate AUM of ¥89 trillion ($840 billion) as of March 2020, of which ¥75 trillion is from defined benefit (DB) plans and ¥14 trillion from defined contribution (DC) plans, according to the Trust Companies Association of Japan.

The average asset allocation of 106 corporate DB plans, as of December last year, showed that alternative investments represented 12% share of their portfolios on average, a survey conducted by Willis Towers Watson (WTW) shows.

Asset allocation of 106 corporate DB plans as of Dec 2019 (Source: WTW)

Japan’s corporate pension funds aren’t unique in their shift towards high-yielding alternatives. Asset owners across Asia Pacific too have been increasingly keen to raise their investments into illiquid assets such as private equity, private debt, infrastructure and property.

This trend is occurring due to a broad-based belief that a post-Covid-19 global economic slowdown will hurt their ability to reach investment return targets, according to a new survey by Schroders published on Wednesday (October 7).


As Japan’s pension funds invest more into alternatives, they are also expected to continue to invest in overseas bonds. The shift into foreign debt has been a trend in the last five years after the Bank of Japan introduced its negative interest rate policy in 2016.

The funds’ penchant for overseas bonds is not without challenges. Japan’s pension funds have struggled to find suitable opportunities in offshore bonds even those from advanced economies, according to Kumara. Even as they seek low risk and stable investment assets, the extremely low yield in sovereign bonds and continuing uncertainties in these economies meant that they are left with limited choices, he said, adding that Japan’s pension funds prefer US bonds as some European countries have negative interest rates.  

Emerging markets bonds aren’t well regarded either primarily due to the fluctuations and volatility in foreign exchange rates of these markets versus more mature currencies, Tokushima said.

That said, Japan’s corporate pensions still prefer to deal with foreign exchange risk in the bond markets than price fluctuations in equities. Pension funds in Japan have reduced their exposure to equities after the market turmoil earlier this year. They would rather invest in fixed-income despite its low yield than to invest in foreign equities, Tokushima said.

The Willis Towers Watson survey showed that local bonds make up the biggest portion of Japanese corporate pension funds' portfolios at 33%, while foreign bonds accounted for 27%. 

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