What Japanese LPs want

Takako Koizumi, investment director at Tokio Marine Asset Management, tells Shawn Wang about the strategies and sectors that are capturing the attention of Japanese institutions.

Q: How are you investing in infrastructure?

TK: Tokio Marine Asset Management is a gatekeeper for Japanese pension funds and other institutional investors. We select and invest in infrastructure funds, which we believe work best for customers' portfolios and needs.

Recently, many Japanese pension funds have decreased their exposure to listed stocks and mobilised these resources to other asset classes such as alternative investments, not to stretch their investment return but to diversify and stabilise their portfolio. Among such alternative investments, Japanese investors' interest towards infrastructure has been on the rise. The ageing Japanese population has increased demand for cash, and investors see infrastructure funds, which offer inflation-linked and stable cash yield, as a possible solution.

Therefore, our portfolio is centered around core and core-plus strategies mainly in the OECD countries (Europe, North America and Australia) where political and regulatory risks are lower and legal systems are more clearly outlined, but we consider value-add strategy GPs to the extent there is client demand.

Lastly, while some Japanese pension funds have preferred investing in open-ended funds from a liquidity standpoint, others have shown preference towards investing in closed-ended funds to get a clear-cut, definitive performance in a fixed time frame. Since we believe both open-ended and closed-ended funds have unique pros and cons, it is important to consider our investors' investment objectives and fund managers' investment strategies, and incorporate both types of funds to develop a balanced portfolio.

Q: What is the company's investment strategy in the next 12 months?

TK: We focus on manager quality and try not to take a top-down approach to selecting particular sectors or strategies, so we will continue to focus on funding the best managers in the market. Having said that, given the pricey environment for infrastructure assets, particularly in the core infrastructure space, we look for more creative strategies such as the value-add space where managers may find a less competitive deal sourcing environment as well.

Q: What is your outlook on infrastructure investment in the Japanese and global markets in 2017?

TK: In 2016, we saw the Japanese infrastructure market start to rise. We saw the launch of a listed infrastructure fund, and the privatisation of some airports and roads. We also saw continued construction and transactions of solar power generation facilities, which began a couple of years ago.

Japanese investors have a strong interest in investing in domestic assets, which do not give rise to foreign exchange risk. Many investors are also interested in investing in assets that could contribute to growth in Japan's economic potential.

Until now, the number of infrastructure investment opportunities within Japan was limited compared to ones overseas, but we expect to see an increase in the future. While the speed of the expansion may not be significant this year, we already see some changes from past years.

Globally, we expect the high investor interest and robust investment environment to continue.

Q: How do you view, and will you consider, private infrastructure debt investments?

TK: Debt funds are popular among Japanese investors. This popularity may be attributed to the fact that debt funds have income-oriented returns and simultaneously alleviate exit risk. However, since many loans financed during the post-GFC years and European debt crisis – when the debt market was controlled by lenders -have already been refinanced, we believe refinancing opportunities are not abundant in the corporate credit and real estate markets. Since the market size of junior/mezzanine debt is small, we are seeing investable money exceed investment opportunities resulting in slower investment in this arena.

Ultimately, if one were to invest in debt, we believe it is becoming very important to find disciplined managers with superb sourcing ability.

Q: Do you prefer developed or emerging markets?

TK: Our clients, mainly Japanese pension funds, expect infrastructure to provide diversification and a steady income to their portfolio. Therefore, we primarily target OECD countries that have less exposure to political and regulation risk, and a more established legal system. Nonetheless, we acknowledge that there is a short supply of infrastructure in emerging markets and believe that there probably are good investment opportunities there. We will be keeping a close eye on it.

Q: Would you consider launching more in-house infrastructure funds, or do you still prefer to invest through external fund managers?

TK: With regards to domestic solar investments, we have developed, and currently manage, our own fund together with a partner, which is engaged in many power generation projects both in Japan and abroad. Beyond that, however, since regulations and practices on infrastructure vary between countries and regions, and since infrastructure investments stress local ties, such as relationships with local counterparties and regulatory authorities, we will continue to make international investments through funds.

Q: To what extent have Brexit and the US presidential election affected the company's investments?  Have you adjusted your strategy?

TK: So far, I think Brexit has only had a minimal impact on infrastructure assets. Including listed funds, infrastructure funds' performance has not decreased for the most part. I believe that Brexit confirmed that infrastructure is an asset class not easily affected by, or strongly linked to, the economy.

As for the new US administration, we are paying close attention to corporate tax reduction and energy policy. We presume that this may have an impact on renewable energy investments in the US.

In any case, we remain steadfast in the belief that diversification of region, sector, and vintage is important and we do not plan to make any special changes to our manager selection criteria as a result of the 2016 events. We will continue to leave any adjustments to specific investment strategies to individual managers who are experts in their fields.