Japanese corporate pensions interest in alternatives wanes

With alternatives now constituting a larger portion of pension funds' portfolios, they are closely assessing fixed income opportunities, according to a recent survey.
Japanese corporate pensions interest in alternatives wanes

Although Japanese corporate pension funds are allocating more to alternative investments, their enthusiasm for these private market assets is on the decline.

At the same time, these funds have been re-evaluating the costs associated with hedging foreign fixed income investments to determine if investing in domestic bonds could be a more attractive option.

While a relatively large increase in alternatives allocations have occurred in recent years, it is difficult to imagine that the increase will continue at the same pace going forward for these funds, according to the most recent survey of Japanese defined benefits (DB) corporate pension funds by JP Morgan Asset Management (JPMAM).

Kaguya Komatsu,

Instead, the asset manager expects that corporate pension funds’ increase in alternatives will generally happen at a more “cruising pace” in the future, Kaguya Komatsu, head of Japan funds business and institutional business at JPMAM, explained to AsianInvestor.

Firstly, allocations to alternatives already make up a quarter of Japan pensions’ overall portfolios now.

“Given DB pension’s philosophy is diversification of portfolio, no single asset class should be dominating the portfolio. Hence, we think the room is limited for the share of alternatives to rapidly increase in their portfolio,” Komatusu said.

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She added that although 29.6% of respondents said they would increase their alternatives allocation, it is noteworthy that this response is down from the 2018 edition of the survey which found 59.2% of respondents saying they would increase.

The survey was conducted among a total of 81 Japanese pension funds, including 80 DB corporate pensions and one mutual aid. It showed that the average allocation to alternatives was 23.4% of the total portfolios, and the share has been steadily increasing.

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.


The survey also revealed that Japanese corporate pension funds are now closely monitoring how much the yield on Japanese government bonds (JGBs) could go up.

“51% of respondents chose 1% to be the yield level when they would start considering investing in JGBs” Komatsu said.

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The survey also revealed that the handling of hedged foreign bonds is becoming a major drawback, considering the rise in exchange rate hedging costs for the Japanese pension funds.

The current cost of hedging Japanese yen against the US dollar is around 5% while the US 10-year treasury yield is 4%, Komatsu pointed out.

“It means Japanese investors get negative 1% return if other conditions remain unchanged. This will promote DB pensions to think about allocation change from foreign fixed income to JGBs, along with expected Bank of Japan policy changes,” she added.

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