Japan Post Bank (JPB) plans to pour some $62 billion into alternative investments over the next three years, quadrupling the share of such assets in its $1.8 trillion portfolio, according to the strategy plan it released last week.
The huge institution will also set up a joint investment company alongside affiliate unit Japan Post Insurance to look at private equity opportunities, with a view to financing buyout deals and investing in domestic technologies and startups. JPB is also reportedly establishing a $1.5 billion hedge fund.
All this is part of a drive to increase risk asset exposure to boost earnings and offset declining income from yen-denominated bonds.
JPB is now seen as ready to manage its investments more actively, with head of asset management Katsunori Sago set to leave, having built the alternatives team, the job for which he was hired in 2015. He wil reportedly take up an appointment on the board of Japan's SoftBank group.
JPB’s three-year management plan for the period from April 1, 2018 to March 31, 2021 forecast that alternative investments—or what it terms its “strategic investment area” (SIA)—would rise to account for 4% (¥8.5 trillion, or $76 billion) of the overall portfolio by the end of March 2021 from 0.7% at end-March this year.
The SIA incorporates private equity, hedge funds, real estate funds (including equity and non-recourse loans and commercial mortgage-backed securities) and direct lending funds.
JPB said the overall proportion of risk assets—including alternatives, credit, foreign government bonds and equities—will rise by 5 percentage points to 45% of its portfolio.
ALLOCATION STRATEGY SHIFTS
JPB’s push into alternatives reflects a major trend among Japanese institutions seeking higher yields in an ultra-low-interest-rate environment domestically.
Peter Douglas, alternatives specialist and principal of the Singapore office for the Chartered Alternative Investment Analyst Association (CAIA), said the environment for asset allocation among Japanese institutional asset owners had changed dramatically in recent years.
“We can argue about the actual level of inflation in Japan, but for sure there is some inflation,” he told AsianInvestor. Core inflation, which excludes fresh food prices, stood at 0.7% in April, down from 0.9% in the previous month, according to government data released on Friday.
“In this environment, earning nothing on long-dated government bonds and a few basis points on cash, results in guaranteed erosion of wealth,” noted Douglas.
As a result, conservative asset owners are having to make major revisions to their asset allocation policy, he added, and in some cases even revising their investment guidelines to do so.
Yet for some institutions, which may have never ventured beyond Japanese government bonds (JGBs) and cash, moving into volatile equities can be too risky. Alternatives are seen as a more attractive opportunity, especially as they promise more consistent returns with moderate risk, Douglas said.
As a result of JPB’s planned increase in alternatives exposure, the contribution of various assets to net interest income over the three-year time frame is expected to change.
Overall, risk assets will account for 74% of net interest income, up by 9 percentage points, by March 2021.
As for individual asset types, currently credit (considered a risk asset) generates about 64% of net interest income, while alternatives only bring in about 1%. By March 2021, alternatives will contribute 11% to net interest income, while credit will account for 63%.
JGBs’ share in net interest income is expected to fall to 26% from 36% over the same period.
WHEN THE BUILD-UP BEGAN
In many ways, the drive to raise exposure to risk assets and move away from local yen bonds was set in motion in 2015, when it hired Sago, a former Goldman Sachs executive, in 2015.
He was chiefly responsible for building out Japan Post Bank’s alternative investments team. The attempt to move away from traditional bonds and modernise its portfolio contributed to the bank winning AsianInvestor’s institutional excellence award for Japan last year.
However, Sago is set to leave the bank in mid-June in what some experts suggested was a planned move. Sago previously said he would be with JPB for three years, and that time has now come to an end, noted Jesper Koll, head of Japan at exchange-traded fund manager WisdomTree.
“The important thing is that the team is now ready both in terms of capital and infrastructure and capabilities,” he told AsianInvestor. “We should now see the beginning of more active management of the bank’s assets.”
There is also the possibility of JPB managing its own in-house funds, added Koll, and long-only, long/short and multi-asset strategies are all on the table.
Indeed, JPB plans to launch a $1.5 billion in-house hedge, according to a Financial Times article published on May 15, but did not respond to a request on the accuracy of the report. Hedge funds clearly hold strong appeal for the institution: in December, it said half of its allocation to alternative assets was in hedge funds, as AsianInvestor reported.
CAIA’s Douglas said Japanese investors that kept faith with their hedge fund portfolios over the last few years have had a generally good experience, despite the bad publicity around the industry.
“Remember that a return of 3% or 4% is still a good real return in Japan," he noted "Hedge funds with low volatility and low drawdown histories are an attractive investment to them."