TOKYO -- Japanese pension funds may move up to Y767 billion ($7.5 billion) into alternative investments during the next few years.
Looking for both higher potential returns and low correlations to domestic stock and bond markets, Japanese pension funds over the next several years are expected to move from a base of virtually zero into alternatives -- including hedge funds, market-neutral funds, buyout and venture capital vehicles.
"It may take some years, but I would expect that about 5% of Japanese pension funds will be allocated to alternative investments," said Makoto Takano, Goldman Sachs Asset Management Japan's executive officer and general marketing manager.
InterSec Research Corp., Stamford, Conn., said Japanese pension funds had $1.54 trillion in assets as of year-end 1999.
Trying something new
For example, the pension fund for Mitsubishi Corp. group invested Y4 billion through Mitsubishi Securities Co. in buyout and venture capital funds of funds managed by Pacific Corporate Group, La Jolla, Calif. Mitsubishi's pension fund plans to allocate 7% of its Y190 billion in pension assets to alternative asset classes and strategies this year.
Key to this new interest was a change in attitude last fall by a pension fund umbrella group.
"The No. 1 factor is a change in the Pension Fund Association's approach toward alternative investments," said Norio Kawakami, president and chief executive officer of Paribas Asset Management Japan Ltd.
In its policy outlines, announced in October, the PFA said for the first time that it would consider alternative investments as part of its investment options. The PFA administered Y51.28 trillion in mandatory national savings, the equivalent of Social Security, as of fiscal 1998, the most recent available data. A spokesman said the giant fund has not yet determined its alternatives strategies.
If the statement by the PFA was a domestic incentive, the asset class also has been boosted by reported stellar returns earned by the $175 billion California Public Employees' Retirement System, Sacramento, Mr. Kawakami added.
Last year's volatile securities markets are causing pension executives to rethink investment strategies, said Michio Shimizu, director of Sparx Securities Co. Ltd., a marketing arm of Sparx Asset Management Co. "Last year's experience also has made them re-realize the murkiness and unpredictability of price movements of traditional assets, prompting them to turn to alternative investments . . . to secure absolute returns of their portfolios, which are so heavy with domestic equities," he said.
Also helping boost interest in alternatives were two regulatory changes.
On June 1 an investment rule that limited in-house investment solely to domestic government bonds was abolished, as was a rule preventing Japanese pension funds with less than Y50 billion from managing all of their portfolios internally. Previously, only large pension funds were permitted to run assets internally.
"Changes in the investment rules will open the way for pension funds to freely invest in alternative asset classes and strategies through in-house management," said Hideo Suzuki, executive director of Tokyo Taxi Companies Employees Pension Fund. Mr. Suzuki said his fund plans to allocate 4% to 5% of assets to alternative asset classes and strategies, but it will take two to three years before the investments will happen.
Down the road
Indeed, both Japanese pension funds and money managers think at least two to three years will be needed before alternative investments will be added to the allocations of most Japanese pension funds.
A spokesman for Mitsubishi said the main attraction of alternative investments is the low correlation to traditional assets.
But not every pension fund has enjoyed an entirely good experience with alternative investments. Hiromi Sugiyama, executive director of the pension funds of CSK Corp., bluntly stated his fund went into alternatives "just to make money."
In April 1999, the pension fund of CSK corporate group, Japan's largest data processing service firm, invested Y1.2 billion in an offshore Japanese equity long-short fund set up by Sparx Asset Management Co. Ltd., founded by Shuhei Abe, who has worked at Nomura Securities and managed Japanese equities for George Soros.
During the first six months, the fund managed to secure a return of around 20%. But Mr. Sugiyama was not pleased with the annualized return. So in April he redeemed his investment in this offshore hedge fund and reinvested the total sum with Sparx in a long-only domestic equities strategy, Mr. Suzuki said.
In March, CSK also invested Y1 billion in securitized real estate.
"Traditional assets like equities and bonds do not interest us," he said. "Market-neutral strategy is still tricky because you must find a fund manager who really knows how to optimize the short position. So for the time being, I find securitized real estate quite interesting and am ready to snap at it when an interesting deal comes my way."
So far, Japanese pension executives have warmed more to absolute-return strategies, such as market-neutral products, sources said.
"They've historically looked at products that have delivered them a positive absolute return and don't think so much in terms of benchmarks and relative returns as we do in the U.S.," said Marlis Fritz, managing director, global market for AXA Rosenberg Group, Orinda, Calif.
Takeshi Suzuki, assistant manager of Sparx Asset Management's pension team, said, "We are targeting absolute returns of 10% from our Japan equity hedge fund, which will be managed by a long-short strategy." Sparx hopes to have 20 pension funds subscribing to its long-short strategy by next April.
Sparx Asset has about Y230 billion in assets under management, with about Y7.5 billion from pension funds.
Since February, Paribas has been marketing a dollar-based hedge fund of funds to pension funds. The Paribas Liquid Hedge Fund consists of four primary strategies of event-driven risk arbitrage, event-driven distressed, equity market neutral and equity hedge. The fund's "multimanager program and segregated accounts are the main selling points of our investment plans," Mr. Kawakami said.
Paribas is using alternative investments as its main tool in getting a small piece of Japan's huge pension market. Its absolute-return objective of 10% to 15% should help woo pension funds saddled with staggering pension shortfalls.
Goldman Sachs Asset Management Japan. Ltd. has been marketing to pension funds a hedge-fund-of-funds program set up by U.S. subsidiary Commodities Corp. Ltd. The company also plans to start offering a long-short investment strategy of domestic equities soon.
Not just newcomers
A major player in Japan's pension asset management business also has started selling alternative asset classes and strategies.
Daiwa Bank, which ran a total of Y6.3 trillion for 5,150 Japanese pension funds as of March 31, launched an offshore hedge fund of funds for 12 Japanese pension funds in April. The fund is subadvised by a U.S. firm whose name was not available.
"When we decided to move into alternative investments, we thought private equity, LBO and venture capital are most suited for the socioeconomic responsibilities that pension funds should shoulder: recycling of the risk money in order to invigorate the economy," said Takahiko Nakano, general manager of Daiwa Bank's investment planning department. "But social structures, including tax breaks, are not ready for such investments. So we started with a market-neutral strategy."
Tokai Asset Management Co. Ltd., which managed Y251 billion for 66 Japanese pension funds as of March 31, set up a strategic management division in April to sell alternative asset classes and strategies.
On May 17, Jafco Co., Japan's largest venture capital firm, said it had set up a joint venture with pension funds to invest in unlisted startups. The Y20 billion in assets was provided equally by Jafco and the pension funds. Jafco plans to invest in domestic and overseas emerging firms during the fund's 10-year term, looking for higher returns than those on listed stocks and bonds. Jafco established a similar fund worth Y5.1 billion in January 1999.
Masaaki Tachikawa, general manager of Jafco's investor relations, welcomes pension funds' increasing interest in alternatives, including venture capital. But he was quick to caution that a sudden influx of assets into Japan's venture capital market would hurt startups, not nurture them.
"Japan's domestic venture capital market is still very small and entails a big risk. We want only the players who know all the risks and responsibilities . . . to participate in the market," he said.