Japan’s Pension Fund Association (PFA) was set up in 1967 and came into being in its current guise in 2005.
It provides benefits to people who seceded from employees' pension funds after a short period, usually less than 10 years. It undertakes aggregation of corporate pension plans, including defined benefit and defined contribution.
The PFA has a total of ¥12.7 trillion ($106 billion), of which it manages about ¥5 trillion internally.
In an exclusive interview with AsianInvestor, Daisuke Hamaguchi, PFA chief investment officer, explains the PFA's asset allocation strategy, what its hiring needs are and how the firm has dealt with risk in the years following the collapse of Lehman Brothers in 2008.
Q How are you allocated?
A Our equity portion stands at about 45%, of which 40% is domestic and 60% overseas. The remaining 55% is broadly in what we call fixed income, which includes hedge fund strategies, real estate and infrastructure, although long-short is included in equity.
So you don’t use the term alternatives?
We do call it alternative, but for actual asset allocation decisions we use equity or fixed income. Prior to the Lehman shock we had a peak of 55% in equity. We maintained that after Lehman, but now there has been a recovery we are trimming risk.
What was your funding level when you had 55% equity exposure?
Our ratio allocation officially started right after Lehman. While it had been calculated previously, I tried to bring discussions on funded status into the investment arena. We formally introduced our dynamic asset allocation strategy right after the Lehman shock.
Did you use a consultant?
Not formally. We developed a system ourselves that is straightforward, similar to the ones used by Mercer, Russell Investments and Towers Watson in the US and Europe.
So you have trimmed your equity allocation to 45%. How have you reallocated?
Some went into hedge funds and infrastructure, but a lot went into domestic and foreign bonds.
What is your risk tolerance on the fixed income side?
We have everything. We include high yield in the portfolio, with distressed positions through hedge fund managers.
When did PFA start making alternative investments?
We started private equity in 2003. We use direct funds, not fund of funds, and we work with several gatekeepers in the US and Europe who recommend the funds. Then we do our own due diligence and decide. Private equity now makes up about 2% of our 45% equity allocation
Does that include co-investment?
Yes, we do co-invest, particularly in Japan’s private equity market. But it is still relatively small.
Which risk exposures have you trimmed as your funding level increased?
We have several trigger points, it depends on the movement of each market, particularly domestic versus foreign. As I said, we have 40% exposure to domestic equity and 60% to foreign equity. We maintain that through normal rebalancing.
What internal staff levels does PFA have?
We have 30 professional investors, so we are relatively small. When I joined 10 years ago I started to hire experienced external fund managers. Before that PFA didn’t have many. I gradually included professionals in alternatives, but also in equities and bonds.
Do you have hiring needs now?
Not immediately. Naturally we have turnover. We are a small organisation and not everyone can reach CIO level. There are good career opportunities outside PFA, that is evolution of the industry.
Have the private equity opportunities delivered what you expected?
More or less. My predecessor started to invest and I only joined in 2005. But I have built this out incrementally. It has reached the level we targeted. We are in the last stage of the J curve. Despite that, the number is ok. We are at about target 3% above listed equities. We are trying to maintain that over the long term. The benchmark is MSCI World.
How do you view Asia and emerging markets?
Emerging equity is about 10% of our overall equity portfolio, so we are more or less in line with the index. We started investing in emerging equity more than 10 years ago. Within that we do not have a specific focus on Asia. We do not overweight or underweight Asia against the benchmark. We let active fund managers construct the portfolio. The same is true on the fixed income side. We invest in emerging market debt in-house, more or less following a tailor-made index based on the GDP of emerging countries.
Do you have a strategy for China?
Our exposure to China is small, 10% of emerging equity. Given that emerging equity is itself 10%, China represents 1% of our total equity portfolio.
Do you have interest in getting a QFII licence?
No, I don’t think so. For foreign equity we use external managers.
For the full interview with Daisuke Hamaguchi, see the new (June) issue of AsianInvestor magazine