JPMAM survey shows alternatives becoming mainstream for Japan corporate pension funds

J.P. Morgan Asset Management’s 12th annual survey of Japanese corporate defined benefit plans points to continued growth in alternatives allocations in pursuit of reliable income and downside protection, at the expense of negative-yielding Japanese government bonds.

The survey, based on interviews with more than 110 pension fund executives, shows alternatives moving “from the periphery of Japanese pension portfolios” to being a primary destination, said Akira Kunikyo, a Tokyo-based investment specialist with the firm, in a news release.

For the latest fiscal year ended March 31, respondents reported a record 21.3% policy allocation target for alternatives, topping — for the first time in JPMAM’s 12 surveys — their average Japanese domestic bond target of 18.1%.

The year before, target allocations for alternatives, at 18.9%, still trailed the 21.3% average target for domestic bonds, even as the gap in bonds’ favor was fast narrowing from 7.7 percentage points the year before and 14.2 percentage points the year before that.

Global bonds, meanwhile, further bolstered their standing as the top destination for Japanese pension plan allocations, edging up to 26.7% for the year ended March 31 from 25.5% the year before. Those allocations proved resilient even as the costs of hedging dollar-based assets back to yen rose, shaving more than 2 percentage points from potential returns.

The latest survey, meanwhile, showed pension plans’ exploration of “new solutions to combat persistently low interest rates and meet expected return targets through a potential economic downturn” leading to more diverse alternatives portfolios, the news release said.

The average Japanese pension plan, which for the most part embarked on alternatives allocations via investments in hedge fund-of-funds strategies, now has three to four different alternatives market segments, and a growing emphasis on less liquid segments such as real estate and infrastructure.

Real estate allocations made the biggest contribution to the 1.9-percentage-point rise in actual alternatives allocations for the latest year to 20.8%, with a 0.8-percentage-point rise to 2.2% of portfolios over the past year, followed by a 0.6-point rise in allocations to unconstrained bond funds to 2.7%.

For the coming year, a net 30% of respondents said they plan to further boost allocations to alternatives, while between 2% and 6% said they were looking to reduce allocations to domestic and global stocks and bonds.

Among different alternatives segments, infrastructure looks set to attract the broadest interest over the coming year, with a net 7.8% of respondents reporting plans to boost allocations to infrastructure equity or debt, followed by a net 5.2% looking to invest more in real estate equity and debt and a net 1.7% apiece targeting multiasset strategies, private placement REITs, long/short equity strategies and private debt.