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In a first, Japan corporate pensions’ share in alternatives tops domestic bonds, survey finds

By Asia Asset Management  
Aug 6, 2019

Japanese corporate pensions allocated more to alternative or non-mainstream investments than to domestic bonds for the first time on record in their last financial year, according to an annual survey by JP Morgan Asset Management (JPMAM).

The pensions allocated 21.3% to alternatives versus 18.1% to domestic bonds in the financial year ended March 31, 2019, JPMAM says in a report on August 5.

Their alternatives investment increased from 18.9% in the prior year and was second only to a 26.7% share in global bonds, which was up from 25.5% previously.

The findings are based on JPMAM’s survey of 116 Japanese defined-benefit corporate pension plans between March and May this year.

The company says allocation to alternatives has never before exceeded the share in domestic bonds since it began to conduct the survey in 2008.

Last year, most defined-benefit corporate pensions in Japan did not meet the 2.3% long-term interest rate target they set for themselves “due to falls in domestic equity and insurance linked securities strategies”, it says.

The main source of risk for the pensions is from their investments in stocks, and they are looking to lower the risk by stepping up exposure to alternatives.

The report says pensions are increasingly allocating to low-liquidity alternative assets such as real estate and infrastructure in a bid to obtain stable returns.

According to Akira Kunikyo, an investment specialist at JPMAM, around 39.7% of corporate pensions are planning to increase their exposure to alternatives, although they are unlikely to do this in “a desperate manner”.

“As their funding ratio is around 120%, there’s no need for them to rush into risky assets. It’s more appropriate for them to invest in a strategy that can generate stable returns with low volatility in order to keep [the] high funding ratio,” Mr. Kunikyo tells Asia Asset Management.

Liquid assets currently account for half of the pensions’ alternatives portfolio, and Mr. Kunikyo says they are keen to increase exposure to low-liquidity assets to reduce risk.

He also says the pensions are focusing more on environmental, social and governance criteria amid greater awareness of corporate governance in Japan.

JPMAM had US$1.7 trillion of assets under management at the end of 2018. It did not disclose the combined assets of the corporate pensions in the survey.