Japanese defined benefit corporate pension funds are gaining in investment confidence. A traditionally very conservative selection of investors, they are now on average allocating a record one fifth of their portfolio into alternatives, according to research compiled by JP Morgan Asset Management.
To a large extent they have been pushed into this new mindset – fixed income offers very little excitement and an over-exposure to equities is littered with risk – but it should be commended, nonetheless.
HIGH RISK, HIGH FEES
It’s not for the faint of heart. Alternatives assets – a catch-all term for investments that aren’t classed as stocks, bonds, and cash (or cash equivalents) – often have higher fees associated with them and are more volatile than traditional investments. Also, a typical Japanese corporate pension fund is run by a single investment director, or by a small team, so the resources to invest on their own is in short supply.
That’s where the consultants come in. A well-established part of the Japanese fund management industry, these guys play a very influential role in corporate pension fund investment decision making. The movement to alternatives is no doubt a reflection of what the investment consultants are advising.
Given the pace in which institutional investors across the globe are rushing towards alternative investments, extracting value (relative to risk, fees etc.) is becoming harder to achieve. As such, Japanese asset managers are becoming increasingly vocal as to whether local investment consultants have the right level of expertise to cover this space appropriately.
“I believe consultants are mostly good for investors for stocks and bonds,” a senior Japanese asset manager told AsianInvestor under condition of not being named. “When sitting in Japan, the consultants might not know of very specialised alternative asset managers… globally.”
This is a fair point. Expecting a consultant to know a local real estate manager with specialisation into logistics assets in Benelux countries, for example, would be unrealistic. However, this could be a viable, defensive investment in the current late cycle with low yields for more traditional office assets in gateway cities in Europe.
The Japanese asset manager added it is more likely consultants will advise the pension funds to invest with managers that they themselves recognise; those who are globally renowned and sought-after managers, such as Morgan Stanley. This is also understandable – it’s a safer bet – but the downside is that it can have an inflationary impact on fees.
Equally Japanese CPFs are unlikely to challenge the thinking of their trusted consultant partners. “The directors of these pension funds definitely have a focus on not making mistakes,” the head said. “And by sticking to the advice of consultants, they can prove that they did their due diligence in cases where poor performance is being questioned by their investment committees.”
The issue compounds itself when you consider the structural nature of investing in Japan. Many CPFs invest via commingled funds. This is because around four in ten CPFs have less than ¥10 billion ($92 million) of assets under management, according to Japan’s Pension Fund Association. Another 40% have between ¥10 billion and ¥50 billion.
“Since a discretionary [investment] needs to be agreed among several investors in the fund, some investors’ needing to check with a consultant can delay or disrupt capital commitments to overseas fund vehicles,” explained a director of overseas real estate asset management on anonymity. “In the end, it is up to each investor to make the decision.”
As a CPF ventures into alternative investments, it makes sense to initially diversify to well-known asset managers. But when seeking out other, more specific and niche vehicles, deeper research is going to be required. This is something both the CFPs themselves and their investment consultants would be wise to look into.