Japan corporate pensions set sights on alternatives

Fund of funds and secondaries prove most popular strategy choices.

Japanese corporate pension funds are continuing to shift their capital away from traditional assets and toward alternatives, a survey by JP Morgan Asset Management has found.

At the end of March 2016 their allocation to alternatives reached a record high of 14 percent as investors sought “stable” returns and increasingly diversified revenue sources.

The report, which was conducted from early March to May 2016, surveyed 127 Japanese pension funds, including 116 defined benefit (DB) corporate pension funds and nine corporate employee pension funds.

Winners among the asset classes include infrastructure and private debt; 7 percent of pension funds said they would increase their exposure to the former, 6 percent to the latter. None of the pensions said they would dial back their exposure.

Around 4 percent of funds said they would up their allocation to private equity, while 1 percent said they would reduce it.

Among the 127 pensions surveyed, six new private equity fund of funds mandates and one secondaries mandate were awarded in the last two years.

Over the next year, secondaries and funds of funds will prove the most popular routes to access private equity; the pension funds identified three mandates of each strategy to be allocated in the coming year.

Allocations to domestic bonds shrunk from close to 38 percent in the 2011 financial year to 30 percent in 2015, but held steady from 2014 to 2015.

However, the introduction of a negative interest rate policy by the Bank of Japan in January spurred 49 percent of respondents to either change or consider changing their investment policies. Around 80 percent of respondents consider the investment environment to have changed due to the introduction of negative interest rates.

The survey noted that while the funds’ countermeasures were not “uniform”, they are mainly considering lowering their allocation to domestic bonds and increasing their exposure to alternatives.

On Tuesday the Financial Times reported that yields across the Japanese Government Bond market fell below 0.1 percent for the first time as the fallout from the Brexit referendum reverberated across the globe.

The JP Morgan survey found that as at the end of March, around 70 percent of DB corporate pension funds were invested in alternative assets. Among these pensions, the average allocation to alternatives was 18.8 percent, second only to domestic bonds.

The survey also looked at the way funds allocate their assets based on target return, and found that the higher a fund’s target return, the higher its allocation to alternatives. Those targeting more than 4 percent had an alternatives allocation of more than 25 percent, while those targeting less than 2 percent had an allocation of just 12.5 percent.