PFJC, CDPQ look to alternatives as rates change direction
Senior investment executives at Pension Fund of Japanese Corporations (PFJC) and Canada’s CDPQ said they will focus on private market investments as they assess the implications of interest rates on asset valuations.
Alternative investments are a significant part of PFJC’s portfolio construction and risk management approach, according to Yoshi Kiguchi, chief investment officer at PFJC.
More than 90% of PFJC’s portfolio now focuses on alternative investments such as hedge funds, private equity and private debt as the pension fund aims to avoid taking high risks in public equity, Kiguchi told AsianInvestor’s 14th Southeast Asia Investment Forum held in Bangkok on November 8.
Kiguchi said the pension fund does not have allocations to Japanese government bonds or Japanese corporate bonds right now.
Even though Japanese interest rates moved into postive territory earlier this year, negative interest rates have lasted for over 20 years.
Kiguchi said current interest rate levels do not favour long-term investment in fixed income, adding that there is a need to be flexible and adjust fixed-income allocation on an annual basis.
“...we need more cushion to absorb the volatility of Japan's fixed-income market, so we will wait…We have to consider the interest rate in the US and Japan and forex management.”
It expects to increase allocation to more long-term, high-rated US corporate bonds and government bonds as it sees 'enough cushion' in 10-year- and 15-year bonds to absorb the volatility of the fixed-income market, the corporate pension fund CIO said.
PRIVATE CREDIT, US INTEREST
Leong Wai Leng, managing director and regional head of Asia Pacific of CDPQ in Singapore, sees growing market interest in the private credit market.
About 55% of assets of the pension fund are in private markets, Leong said at the same panel discussion.
Given the changing direction of interest rates, the high returns enjoyed in the markets over the past 10-2- years are unlikely to be repeated over the next decade, she said.
This is driving CDPQ’s strategies to be more purposeful. While the Canadian pension fund is on track to double assets under management, it is also bracing for more normalised returns, she added.
“We are a big ship. You don't steer a big ship from left to right overnight. But it does take time for us to be more purposeful in terms of how we steer the ship along the line of the next 10 years,” said Leong.
To improve efficiency in portfolio construction, Leong highlighted the importance of reviewing the pension fund manager’s capabilities and strengths to determine what it should focus on versus outsourcing to third parties.
Apart from asset classes, there is also a geographical focus on Americas, with the region accounting for 70-75% of their overall portfolio, according to Leong.
The buoyancy of the region is not just in public equities, but also in private credit, infrastructure, and private equity, she said.
“If you're running a global portfolio, it is very difficult to be underweight the US… I think it takes a lot of courage if you're going to be underweight the US, because it has been rather gravity-defying over the last five to 10 years.”
DIVERSIFICATION PLAY
The high interest from institutional investors in private investments was also echoed by Sue Lee, director of APAC head of index investment strategy at S&P Dow Jones Indices, who sees illiquidity premium of private assets driving demand.
Private assets are one of the new sources of diversification that can benefit investors amid the change in correlation dynamics, she said.
Other sources for diversification include commodities such as gold, as well as option-based strategies, Lee added.
Multi-asset strategies offer another avenue for diversification, said KAsset’s head of investment strategy Martina Watcharawaratorn.
The Thai asset manager is recommending clients to add alternative assets to a typical 60:40 portfolio, especially given the high risks in the short term.
Diversification has been a challenge for Thai investors although they are now increasing their international exposure, added Watcharawaratorn.
Investors previously were heavily concentrated in domestic assets like gold, corporate bonds, and Thai equities.