Japan university fund to expand active investing after tough first year
Japan’s ¥10 trillion ($72.2 billion) university endowment fund, managed by Japan Science and Technology Agency (JST), could hardly have encountered a more unfortunate timing to present its first year results.
Even so, the fund is finding its stride in strategic asset allocation, expanding from passive to active mandates among external managers.
In its first fiscal year for 2022 (FY2022) ending March 31, 2023, the JST fund posted a time-weighted return ratio of negative 2.2%, according to its annual report. The annual target return is 3%.
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As of end-March 2023, total assets under management (AUM) stood at ¥9.964 trillion. ¥5.4 trillion, or 54.6%, was invested in fixed income, ¥1.7 trillion (17.2%) invested in equities and ¥64.3 billion (0.6%) invested in alternatives.
The remaining ¥2.7 trillion (27.6%) was still listed as cash and other short-term assets, meaning the JST fund potentially still had an amount of dry powder above $19 billion to allocate before being fully invested. The fund’s reference portfolio is a 65:35 between equities and fixed income, respectively.
The first funding injection of ¥5.1 trillion in March 2022 came immediately after the Russian invasion of Ukraine on February 24, 2022.
“Since then, global inflation has progressed, and central banks around the world have [increased interest rates]. We have built the portfolio amid the rapid monetary tightening and associated volatility in financial markets,” Masakazu Kita, vice president and chief investment officer at JST, wrote in the report.
Within the JST fund portfolio, equities made an annual positive return 1.7% of in FY2022, while fixed income (including short-term assets) and alternatives made negative returns of -3.6% and -4.5%, respectively.
MANDATES GALORE
Throughout FY2022, the fund received the second major scope of funding from the Japanese government, a total of almost ¥4.9 trillion.
“Fiscal 2023 will be the first year in which we will manage a fund scale of ¥10 trillion. Inflation remains high and monetary tightening affects the economy and financial markets,” Kita wrote.
Despite the outlook concerns, the JST fund is continuing its investment drive. As of July 18, the fund was seeking to recruit managers for active equity mandates in both Japan and US markets as well as active fixed income mandates in emerging market bonds, US high yield corporate bonds and Japanese bonds, according to its website.
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The fund was also seeking to recruit trustees for active bond management of UN investment grade corporate bonds. The shift into active managers is noteworthy, according to Tokyo-based investment adviser following the JST fund’s progress.
“They so far only hired passive external managers in global fixed income and equity areas. Most of fixed income is internally managed, while they treat alternative investments as active,” the investment adviser told AsianInvestor, under condition of anonymity.
GROWING ALTERNATIVES
The JST fund internally managed fixed income (including some ETFs) and equity (ETFs) portfolios of ¥5.4 trillion and ¥137.5 billion, respectively, as of end-March 2023
The list of external equity managers included Mitsubishi UFJ Trust and Banking (¥687.6 billion), BlackRock Japan (¥795.9 billion), Sumitomo Mitsui Trust Bank (¥61 billion) and Nomura Asset Management (¥28 billion).
Alternative managers included Neuberger Berman (¥32.3 billion), Mitsubishi UFJ Trust and Banking (¥16.5 billion) and Sumitomo Mitsui Trust Bank (¥15.5 billion). Of the allocation to alternative assets, around ¥29.8 billion went into private equity and private debt, ¥13.1 billion into real estate and ¥7 billion into infrastructure.
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Although marginal exposure to alternative investments with 0.6% of total AUM, the JST fund has ambitions of growing its allocation to the asset class. The fund is investing in alternative investments from the perspective of diversifying risks and securing medium- to long-term earnings, according to the annual report.
“I can’t say a specific number, but alternative assets should be of a certain amount, it should have a sizable weighting,” CIO Kita told Bloomberg in January 2022.
As per the 3% return target, the ¥10 trillion fund will seek to pay out around ¥300 billion each year for high-level research across Japan, especially at public universities. The idea is to shore up the country’s recently declining position in frontier research, and help it innovate.