As some Japanese corporate pension funds expand their alternative asset allocations, more experienced organisations are increasingly seeking more specific alternatives exposures. However, the smaller nature and conservative capital pooling of many of these organisations leaves them struggling to make sophisticated alternatives investments, say executives and market consultants.
Japan’s corporate pensions tend to be on the smaller side. According to Japan’s Pension Fund Association, 40% of corporate pension funds have less than ¥10 billion ($92 million) of AUM while another 40% have between ¥10 billion and ¥50 billion.
The generally diminutive size of pension funds means that many lack the scale to invest directly with overseas asset managers, while they don't possess enough internal manpower to employ alternatives specialists. Instead, they have had little choice but to pool their capital in co-mingled domestic investment vehicles, which are managed by Japanese asset managers or trust banks.
These funds tend to be conservatively run, due to the inclusion of smaller or less experienced investors.
One of the more advanced pension fund users of alternatives is Kewpie Pension Fund, the namesake corporate retirement fund for the food manufacturer best known for its mayonnaise. With assets under management (AUM) worth around $600 million as of November 2019, it is one of Japan's larger corporate pension funds. But it is caught in the limbo of being big enough to diversify but too small to avoid investing overseas through domestic fund vehicles.
Kosuke Okimori, Kewpie’s executive investment director, said he struggles to access the desired type of overseas alternatives fund when he is just one of many investors and able to only place limited sums of capital on the table. So he hopes to convince some of his peers to help him do so.
“I have a few likeminded investment directors among corporate pension funds who are willing to allocate capital to new markets or strategies. I hope that they will gradually become more comfortable with this as their knowledge on overseas alternatives increases,” Okimori told AsianInvestor.
SETTING A COURSE
Japan’s corporate pension funds have gradually opened up to alternatives investments since the turn of the millennium, according to Konosuke Kita, director of consulting at Russell Investments in Japan. They began by investing in funds of hedge funds, and then moved into more illiquid asset types.
In recent years, the alternatives push has begun in real estate and is developing into private debt and infrastructure. So far private equity investments have not seen as much traction, according to Masaaki Sakakibara, director and wealth business country leader at consulting firm Mercer Japan.
He believes corporate pension funds need to set themselves a clear, long-term strategy once they enter alternatives investments, much like Kewpie Pension Fund has done. In this way, the pension funds can gradually build targeted knowhow.
“The largest problem is that corporate pension funds are not designing alternatives programmes by vintage and asset class diversification. They tend to allocate cash on an ad-hoc base. Illiquid private assets, in particular, require sensible design,” Sakakibara told AsianInvestor.
Typically, pension funds start with fund of funds investments to learn about the asset types, while achieving a diversified foundation from the get-go. The next step is to add more specific funds onto the chosen strategy, like Kewpie Pension Fund.
“The most important factor for specific alternatives investments is the capability of the pension officer, but additionally long-term commitment of the pension fund is needed. Such investors typically use external vendors – gatekeepers, trust banks and consultants – appropriately,” Kita told AsianInvestor.
Sakakibara concurred, noting that such utilisation will help define an initial target share of assets under management (AUM) into alternatives.
“Gatekeepers and OCIO [outsourcing the CIO role] are the right solutions to enjoy effective diversification with smaller investments. Secondly, it will make it easier to diversify the vintage year of investments when alternative market and assets are getting fragmented,” Sakakibara said.
By this he meant the diversification that occurs when capital is gradually invested alongside other capital, spreading the investments across a larger portion of the economic cycle.
This emphasis of downside protection is also reflected in the preference for open-ended core vehicles where investors can, in theory, ask to withdraw their investments. Although illiquid in nature, corporate pension funds still look to keep their investments as liquid as possible.
“In the private sector, open-ended vehicles are very common, because they can expand their own scale to enable diversification. And open-end vehicles give investors the impression they are not too illiquid, so it is easier for pension funds to invest,” Kita said.
MISSING UPSIDE POTENTIAL
Kewpie, meanwhile, has plans to further diversify its alternative asset investments – provided it can get the attention of the right general partners.
Okimori pointed to specific alternatives strategies that Kewpie Pension Fund has looked at, in vain, in order to grow its illiquid alternatives allocation, which stands at 15% of AUM. For instance, the pension fund wants to invest further into infrastructure in the shape of asset-backed securities, such as aeroplanes, and into private equity and private debt funds.
He also wants to potentially expand into alternatives vehicles focused in Asia, among them private equity secondaries. These efforts are all part of Kewpie Pension Fund's aim to achieve an annual return target of 3%, net of costs.
“While I see a potential upside in investing in Asia-focused fund vehicles, other corporate pension funds still prefer either global vehicles or regional vehicles in the mature US and Europe markets. The downside protection is still the most important factor [among Japanese asset owners],” Okimori said.
It has proven a challenge, however, to follow through on these diversification plans fully. Peer corporate pension funds prefer to invest in more known alternatives products, such as US or global real estate or infrastructure equity funds. They are more focused on minimising downside risk, as many corporate pension funds seek aim to achieve an annual return closer to 2%.
“It is a challenge to investment efficiency that trust banks need volume and time – up to three years – to raise and deploy capital. Not all investors want the same thing although they are gathered in the same trust vehicle,” Okimori said.
“All of these factors are the conditions you have to navigate when you are a relatively small institutional investor,” he added.