Japan corporate pensions adopt selective approach to alternatives
Japanese corporate pension funds are diversifying their portfolios by increasing their allocation to alternative assets, according to JP Morgan Asset Management's (JPM AM) annual survey of Japanese defined benefit (DB) corporate pension plans.
The survey reveals a growing interest in low-liquidity, income-generating assets, with a particular focus on infrastructure investments and privately placed real estate investment trusts (REITs).
“Hedging costs have increased, and they want strategies that do not lose to costs. New alternative strategies are emerging, and they want to diversify even within private assets. There are few other asset classes that provide stable performance,” Kaguya Komatsu, head of Japan funds business and institutional business at JPM AM, told AsianInvestor.
The survey also revealed a growing preference for private debt, which is attractive due to its potentially high yield, indicating a clear focus on income-generating investments.
“The predictability of total returns is high because income returns can be expected. As a result, volatility is also low, making it easy to incorporate into the portfolio. The return level is reasonably high, matching the macro environment with high hedging costs,” Komatsu said.
The JPM AM survey was conducted among 80 DB pension funds in Japan and took place between April 2024 and June 2024.
NEW HEIGHTS
The 2024 edition showed that alternatives made up 24.2% of the average portfolio mix among the surveyed pension funds. This is highest average share of alternatives since the first edition of the survey in 2009.
The 2019 edition of the survey, for instance, showed a share of 21.3% of alternatives allocation, while it was 12.8% in the 2015 edition and just 5.4% in 2009.
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31.3% of the respondents indicated plans to increase their allocation to alternatives. While the pace has slowed, the preference for alternatives continues to be strong. Only 7.5% said they might decrease alternatives in the portfolio mix.
The current figure aligns with last year's survey, where 29.6% of respondents indicated plans to increase their alternatives allocation. However, it's notable that in the 2018 edition of the survey, a significantly higher 59.2% of respondents expressed intentions to increase their allocation to alternatives.
“It has been several years since DB pensions started investing in alternatives, especially private assets. Alternatives now account for a quarter of the portfolio, and they want to see the performance of the invested strategies first,” Komatsu said.
PRIVATE DEBT
A preference for private debt is a general trend among Japanese asset owners.
Japan-based investors, or limited partners (LPs), are anticipated to add private debt to their portfolios during 2024, and 60% already had allocation plans in the first quarter of 2024, according to a global investor survey by alternatives data provider Preqin released in March.
Over 46% of Japan-based investors seek returns of 8% or less on private debt, compared to 25% of investors globally, according to Preqin’s investor survey highlighted in the newly released report “Fundraising from Japan 2024: A guide to raising capital”.
“Investors' return targets have generally become more conservative, particularly given the current macroeconomic environment. However, Japan-based investors have set lower return targets than investors globally, due to comparatively low domestic interest rates,” Gerard Minjoot, analyst, research insights at Preqin, told AsianInvestor in April.
Also read: Japanese asset owners looking for private debt bets
Since Japanese investors are content with lower target returns, their expectations for private debt over the next 12 months are mostly favourable, with 90% of respondents expecting the asset class to perform similarly or better than the previous year.