Japanese pension funds in ‘wait-and-see’ mode on infra

Almost half of LPs are undecided on whether to increase their exposure to the asset class, a new survey reveals.

A survey conducted by JP Morgan Asset Management has found that 43 percent of polled LPs are unsure whether to start or continue investing in infrastructure compared with 28 percent who say they will increase their exposure to the asset class.

The remaining 30 percent of the 116 corporate pension funds surveyed said they would not increase their allocation to infrastructure.

“This is a reversal of aggressive investments in alternatives taking place over the past few years,” Akira Kunikyo, an investment specialist at JP Morgan Asset Management, told Infrastructure Investor.

“In general, corporate pensions review their portfolio every three to five years. Those which have started investing in infrastructure strategies have shifted to ‘wait-and-see’ mode and will review [their exposure] when the next review comes.”

None of the investors surveyed said that they planned to reduce their exposure to the asset class.

More than 30 percent of the firms surveyed have already invested in infrastructure equity, while 18.3 percent have exposure to infrastructure debt.

Kunikyo explained that Japanese investors prioritise equity investments due to the cost of currency hedging, which might be higher than the returns expected for senior infrastructure debt strategies.

“Infrastructure equity offers attractive returns even after the FX hedge,” he said.

Most of the investors saw the asset class as an alternative source of fixed income, with 46 percent of respondents saying that funds to expand their infrastructure exposure were being shifted from stable assets in their portfolio, such as bonds.

“Income-oriented strategies, such as infrastructure and real estate, have played a significant role to substitute exposure to Japanese government bonds, given the Bank of Japan’s massive easing, and especially its negative interest rate policy,” Kunikyo said.

Asked about their focus when investing in infrastructure, 87 percent of LPs said the level of expected returns vis-à-vis the risk profile was one of their top considerations when making new commitments.

Whether the vehicle was open- or closed-ended remained an important factor for almost half of the respondents.

“Japanese corporate pensions prefer open-ended funds,” said Kunikyo. “Given that they have less investment experience in illiquid strategies, relatively liquid [ones] are preferred.”

He also pointed out that open-ended vehicles offer geographic and sector diversification, without the J-curve effect.

According to the survey, asset allocation to alternatives grew to an average of 20.8 percent of LPs’ total portfolios in 2019. Asset allocation to infrastructure reached 1.3 percent of their AUM.