Kewpie Pension Fund, with assets of ¥70 billion ($670 million), is to conduct a three-year revision of its investment portfolio by the end of this month that will likely see it raise its investment into long-term illiquid assets by about 50%.
In an interview, chief investment officer Okimori Kosuke told AsianInvestor that the fund, which is the retirement pot for mayonnaise manufacturer Kewpie, wants to raise its non-vanilla investments to meet its 3% annual returns target. Hitting that target is not proving particularly easy amid Japan’s ultra-low interest rate environment.
“Illiquids were around 6% or 7% three years ago, and are around 10% today, and the next three years [of portfolio allocation targets] have not been authorised yet, but perhaps this could increase to something around 15%,” Kosuke said, on the sidelines of the AsianInvestor 7th Japan Institutional Investor Forum in Tokyo on March 15.
He noted that Kewpie is already conducting a few strategic changes, including merging its domestic and foreign bond positions into one and doing the same with its local and offshore equity positions. The fund has a relatively broad definition of alternatives that includes illiquid as a separate asset class that is defined as assets that need over 12 months to cash out of.
Kewpie's broader alternatives asset class makes up around 50% of its total portfolio and includes multi-asset and multi-strategy investment approaches in this catch-all asset class, alongside hedge funds, insurance-linked products and real estate.
Kusoke, who has run Kewpie’s pension fund since 2012, said he is looking to broadly invest about 70% of this reallocation into debt and 30% into equity, and that half of each respective position will go into onshore assets and half into offshore instruments.
“Overall I try to [do] 50% Japan and 50% overseas, mainly because of hedging costs,” he said. “Traditionally there are more [bond] coupons overseas rather than Japan, so I don’t have any regulations or internal rules about this, but for the last five years I keep to 50:50 all the time.”
There will also be some position building in foreign equities. “At this moment we don’t have any long-only foreign equities … [our previous positions] were shifted into illiquid assets like overseas private equity and overseas private debt,” Kusoke said.
The fund has also pulled back from Japanese government bonds, holding less than a 3% portfolio position. “When [Bank of Japan governor Haruhiko] Kuroda decided [to embark on] the QE (quantitative easing policies), at that level I decided to stop investing in this area,” he said.
Kusoke said he’s confident in keeping a relatively high position of assets in alternatives because the fund doesn’t need a lot of liquidity right now. “We don’t need any cash for one single employee for 40 years so I decided that maybe 50% of total assets we may need for liquidation for emergency payments. The rest of the 50% is considered for alternatives.”
When deciding on alternatives, Kusoke divides them into short, middle and long-dated instruments. Hedge funds might be considered short-dated, as they can be redeemed every month or two. Assets such as insurance-linked securities fall into the middle bracket, while a real estate fund investment would be considered an illiquid asset.
Kusoke said most of the products he opted for played a tactical role.
“For example, multi-asset I put between equity and bonds as it’s an automatically adjusting product. And market-neutral [equity positions] are a dilution of the volatility of long-only equity. Most products I give some kind of role for keeping volatility low, or for other tactical purposes.”
Unusually for a pension fund, Kewpie is not using passive investments at all. Kosuke said it’s largely down to the fund’s focus on overall returns.
“Historically when I was in charge of this fund 80% was active and 20% was passive, because we say net [returns are what matter]. If they can reach their targets I am happy to pay a reasonable fee. We mandate by trust bank or asset management company and we give the same target, as in a 3.25% net return [slightly above its 3% target], so as long as they achieve this target I said I don’t care [what they charge], so they recommend active [strategies] such as high dividend or low beta-type products.”
And have they consistently hit the target that you’ve set? “Generally, yes. For example, last year was okay, but this year seems to be difficult,” Kosuke said, adding that extra market volatility and the likely need to raise [cross-currency] hedging could make achieving returns challenging this year. “It’s hard to forecast returns, so we can only expect market-neutral profits, or 2% to 3% returns,” he said.
Due to the fact it represents a food manufacturer, Kosuke says he tried to use the “philosophy of food manufacturing for investment”, placing a lot of emphasis on quality control and understanding the investment process. “I try to be nosy and see whether the managers’ knowledge is good enough,” he said.
His approach includes competition between fund houses. “I give the same mandate [to two managers] and finally evaluate them by performance, plus or minus their services. If the performance is good I might give them more allocation and if not I may reduce and try an alternative manager,” he said.
While Kosuke is making these plans, he notes that his biggest headache is cross-currency hedging. “Japan’s selling side basically has unhedged Japanese yen products and I said three or four years ago ... what will happen when the cost of hedging reaches 3% or 4%? They said, then ‘you don’t have to worry’. And over the last one year everybody is [worrying] about this point."
Kusoke noted that he typically has little choice but to take currency hedging costs, as the local trust banks that Kewpie buys product from typically only accepts yen-denominated versions of overseas funds.
What else would Kosuke like to see change? He noted that asset managers tend to be extremely slow in revealing their investment return figures, typically only supplying them at the end of the financial year, in March. He said the lack of speed in these reporting figures is frustrating.
“We want to shift more to illiquid assets in the future, but this slowness is a barrier because it’s hard to get more understanding about this asset class,” he said.
Are there any solutions to this? “I’d like to see a shift, a kind of accounting law where we don’t have to wait until the end of the fiscal year [to receive investment statements from fund managers] because an estimate should be good enough. If the amount can be adjusted I’d prefer to get 95% of a precise number and get it on time.”