Japan pension funds target alts, foreign bonds

Japanese corporate pension funds are seeking to raise their exposure to alternatives and foreign bonds, creating potential opportunities for international asset managers.

In an annual JP Morgan survey highlighted on the Japan Pensions Industry Database (JPID, www.ijapicap.com), their planned allocations to alternatives – which includes emerging market securities – jumped 1.9 percentage points year-on-year to 10.6% (see table 1).

Also on the rise are planned allocations to foreign bonds, both currency hedged (3.6%) and unhedged (8.8%), and life insurers’ general accounts (10.5%).

In an indication that Japanese corporate pension funds are seeking to put more money to work, their planned allocation to cash sank from 1.4% to 1%.

This increased appetite comes at the expense of exposure to domestic equity, which fell the most at 1.9 percentage points to 12.8%, and domestic bonds, which sank 0.7 points to 35.8%. Allocations to foreign equities also fell 0.9 points to 16.8%.

Interestingly, the JP Morgan survey provides a breakdown by instrument type of the percentage of corporate pension fund portfolios containing non-traditional assets (see table 2).

That illustrates clearly the increasing interest in alternatives, including the first ever exposure for this universe to multi-asset strategies and real estate debt. Evidently there is broader interest, too, in absolute return, private equity, real estate and Reits.

With Japan’s interest rates close to zero, property is an attractive investment target. The country’s Reits market has been the star performer in the first three months of this year, returning 35.8%.

Japan's pension funds are expected to pour offshore with the yen having sunk around 19% against the dollar over the six months to late April, closing in on ¥100 to the greenback. Many pundits expect it to breach that landmark level soon.

While the Nikkei 225 index has rallied almost 60% since early November, April witnessed a surge in yields on 10-year Japanese government bonds (JGBs), from a record low of 0.315% on April 5, by Bloomberg data.

One key risk is that if Japan’s new government achieves its 2% inflation goal, the yield on JGBs will be lower than the rate of inflation. That could prompt JGB holders to offload, causing a shock for a nation whose level of sovereign debt stands at 237% of GDP.

JGBs are almost exclusively held by Japanese investors, with just 8.7% held by overseas buyers as at the end of last year, finds Société Générale. Insurance companies alone hold 19%.

“There is clearly a risk that Japanese domestic investors turn to sellers of JGBs and invest abroad, if they believe the yen will continue to decline,” says Klaus Baader, head economist for Asia-Pacific at Société Générale.

“That’s why it’s important for Japanese policymakers and the G7 and G20 to express their satisfaction with the current yen level and suggest that stability from the current level is desirable.”