Japanese corporate pension funds are beginning to shift assets into alternatives investments, despite a deeply rooted scepticism among some active asset management players toward illiquid assets.
At AsianInvestor's 8th Institutional Investment Forum Japan, corporate pension fund investment executives with a flavour for alternatives investments made a case for increased exposure to lilliquid alternative investments, such as real estate, private equity and private debt.
Critics of these asset classes included Chisato Haganuma, chief strategist for global asset management at Mitsubishi UFJ Trust and Banking Corporation. He pointed out that when this late state of the economic cycle ends, the economy will slow down and impact many investors when it reveals a risk in alternatives.
"In such a scenario, I am more concerned about private equity, private debt and private real estate investment trusts [Reits] because there is a lack of liquidity," Haganuma said on-stage.
"So investing in those illiquid assets, you might earn some source of yield, but I am getting more concerned about this trend recently; whether you can sell those investments if the market moves negatively."
The illiquidity of these private assets is hard to mitigate, which has also concerned investors in neighbouring South Korea. But proponents of alternatives were far less concerned than some speakers on the stage.
One was Kosuke Okimori, executive investment director at Kewpie Pension Fund.
“There is a prejudice among corporate pension funds’ investment committees that illiquid investments are not healthy, but somewhat dangerous. They have a benchmark approach to investment, but I think that is wrong,” Okimori said.
“There is potential to establish or increase illiquid exposure for many corporate pension funds, and we are starting to see some invest in infrastructure debt.”
He invests the corporate retirement fund for Kewpie, a food manufacturer famous for making mayonnaise. Okimori has about 15% of its $600 million assets under management (AUM) in illiquid assets, of which 75% is in overseas markets. Okimori explained that the exposure has been increasing gradually over the last six years, and last year it rose from 10% to its current target level.
“Our pension savers are currently working from age 22 through 63 on average. This means a duration of around 40 years before pension payment starts, so our fund does not need that much liquidity. It has led us to increase our exposure of illiquid and alternatives investments.”
Even more interested in the prospects of alternative assets is Yoshi Kiguchi, chief investment officer of the Okayama Metal & Machinery Pension Fund and West Japan Metal & Machinery Pension Fund. He has spearheaded a strategy that has led to around 90% of the funds' combined $1.2 billion AUM being invested in alternatives.
Kigouchi agreed with Kewpie’s Okimori about the potential to grow alternatives exposure. Speaking to AsianInvestor on the sideline of the forum, he estimated that less than 10% of corporate pension funds in Japan have exposure to alternatives, and primarily debt investments across infrastructure, real estate and bank loans.
“There is room to have some illiquid risk within the portfolios. The implementation can be hard, but they should do so,” Kiguchi said.
“With low interest rates making fixed income less attractive and the higher risk profile of equity, alternatives can help lower volatility and decrease risk, while helping to achieve the targeted returns.”
Kiguchi elaborated that the average return of the total AUM has been 7.1% on average over the last 10 years for the two steel workers funds. He admitted the relatively high return was because he has an unusual higer-risk alternatives strategy, with high exposure to private equity fund of funds and other private equity direct ownership strategies.
The $50 billion Japan Telecommunications Welfare Association (JTWA) is among the investors that have more recently started dipping their toes into the alternatives space.
Kazuhisa Igasaki, director at JTWA, told AsianInvestor that its exposure is primarily into real estate debt in the US. The exposure has reached a level between 2 and 3% of AUM and is likely to stay at this level for the time being.
“We will aim to learn from our first investments before we consider new and further allocations. We recognize that there is a higher risk involved, so we will focus on a slow implementation process,” Igasaki said.
As his more experienced peers, he acknowledged the alternatives have the ability to help JTWA meet its target annual investment return of 2 to 3%. Japanese life insurers have shown less interest in alternatives, although they have also struggled to deal with the country's low interest rates.
Kewpie Pension Fund's Okimori explained that the average return over the last seven years has been 5%, but last year the two subdivided fund vehicles of saw negative 2% and 3% returns, respectively, largely due to volatile equity markets.
Okimori said the reason for raising alternatives was simple: the low interest rate environment has hurt fixed income returns, and forced the fund to seek better risk-adjusted returns elsewhere. However, alternative asset returns typically take time to show up on performance, he stated. The fund's overall annual net return target is 3.25%, but Okimori said even that is becoming a challenge to achieve due to the low global interest rate environment.
“During the last two to three years, we have focused our alternatives strategy on asset-backed investments, such as real estate debt in US,” Okimori said. “Before that, we mainly did infrastructure and also some airplane leasing financing. We have been getting in at a relatively high pace, so we will stick to these asset types in our strategy for now.”