Follow ‘The Whale’

The search for yield amid negative interest rates and global volatility is pushing more Japanese investors to embrace infrastructure as an asset class. For anecdotal evidence of this, you need look no further than Infrastructure Investor’s recent Tokyo conference: of the 200 plus people in the room, half were Japanese institutional investors.

In a way that is not surprising. Liquidity was drawn out from the domestic market when the Bank of Japan sent yields on about 70 percent of the country’s government bonds into negative territory in January. Japan sold negative yield 10-year bonds for the first time and other long-tenor Japanese government bonds hit record low returns of around 0.3 percent. 

The policy has seen Japanese investors intensifying efforts to embrace a more diversified asset mix, with infrastructure seen as an important component. 

Japan’s Government Pension Investment Fund (GPIF), often described as ‘The Whale’, has $1.28 trillion in assets under management, with about 38 percent made up of Japanese government bonds. The fund now plans to invest more in infrastructure in a bid to secure higher returns. 

While Japanese life insurers – including the industry’s two biggest players, Nippon Life and Dai-ichi Life – have been investing in infrastructure for the past few years (and look set to commit more in the future) GPIF now seems ready to gain more familiarity with the asset class. 

This educational process started some time ago, with GPIF commenting in its 2012 Research on Alternative Investment Schemes report that infrastructure investments “enable GPIF to capture [a] liquidity premium and to benefit from diversification”. At the time, the pension found “it is worth considering for GPIF to liaise with experienced institutional investors at home and abroad in order to leverage their investment capabilities and to learn [from] their expertise”.

Fast forward to 2014, and GPIF and the Development Bank of Japan teamed up with Canada’s Ontario Municipal Employees Retirement System to co-invest in infrastructure assets in developed countries. Under the five-year programme, GPIF’s commitments can reach up to ¥280 billion ($2.5 billion; €2.27 billion), which would account for 0.2 percent of GPIF’s portfolio. 

Even so, the pension had only allocated about 0.04 percent of its portfolio, equivalent to some $500 million, to alternative investments by the end of last year. That figure stood at zero a year before, according to its annual reports. It can invest as much as 5 percent, or $64 billion, in alternatives.   

GPIF has been building its alternative investments team since February 2015 and recruitment is reportedly under way for its infrastructure division. The pension fund now views the asset class as one that “provides stable long-term revenue and helps steady pension finances”, the fund’s planning department director, Shinichirou Mori, said in a recent Bloomberg interview. 

So progress is taking place, albeit slowly. What is encouraging, though, is that what GPIF does is likely to be followed by smaller domestic banks and corporate pensions, argues Michael Henningsen, co-head of Asia at First Avenue: “They often look to GPIF as a leader in the market.” 

He continues: “Some of these domestic private equity firms, sponsored by local limited partners, have performed quite well in the local market in the past few years. “With GPIF potentially starting to invest more in overseas infrastructure assets, these smaller players may consider the GPIF approach for portfolio diversification.”

When it comes to what Japanese investors favour, Henningsen points to infrastructure debt as being in demand. “Infrastructure debt with an AAA rating could be a good fit to their portfolios. Compared to a negative interest rate environment, investment-grade debt with low single-digit positive returns becomes relatively attractive and provides yield right away.”

However, “one factor that militates against” Japanese asset managers investing in overseas assets, including infrastructure, “is that negative interest rates will not persist forever,” notes Sadayuki Horie, a senior researcher at Japan’s Nomura Research Institute, in a paper. “Japanese investors need courage to increase their foreign asset allocations while the yen is in an appreciation trend.” 

If 'The Whale' leads the way, though, the infrastructure industry could be in for a treat.