Japanese pension funds are starting to invest in toll roads, ports and pipelines for the first time, seeking higher returns to meet the retirement needs of the world's fastest-aging population.
The pension plan of drugmaker Astellas Pharma Inc., Tokyo, plans to invest in infrastructure funds that target developing and emerging nations, while Shiseido Co.'s ¥150 billion ($1.8 billion) pension plan began investing ¥1.5 billion in U.S. and European assets this fiscal year. Nomura Securities, Japan's biggest securities firm, in June teamed up with a government administrative agency to set up a fund for projects in emerging Asia.
“Diversification has become a ‘must' for pension funds as we've seen in the recent sell-off in stock markets,” said Yoshitaka Rokuta, executive director at the pension fund of Shiseido in Tokyo. “I went all the way to Australia to look with my own eyes at infrastructure projects that are attracting investments such as toll roads and railroads.”
Japan's private pension plans are looking overseas to invest in roads, ports and power plants because most projects in Japan are run by the government and aren't open to investment.
Japanese pension plan returns have been hurt by low bond yields, an aging population and two decades of slumping stocks markets that has sent the Nikkei 225 to a quarter of its 1989 peak. The nation's top 278 companies by market value were a combined ¥21.5 trillion short on pension funding in the fiscal year ended March 31, a 50% increase from the previous year, according to a study by the Tokyo-based Daiwa Institute of Research.
Japan's Government Pension Investment Fund, Tokyo, the world's largest with about ¥120 trillion in reserves, is considering infrastructure investments for diversification and will commission a study on possible assets as early as this month, the fund said in August.
Infrastructure ranked as the top new asset class that Japanese pension plans would consider investing in this fiscal year, according to a survey by J.P. Morgan Asset Management released in April. Seven out of 47 Japanese pensions started investing in the asset class in the fiscal year that ended March 31, while four funds are considering new investments this year.
Astellas aims for alternative investments including hedge funds, private equity and infrastructure to account for 10% of the pension plan, said Ichiro Tajima, a managing director of the fund in Tokyo.
The fund began investing in alternatives in 2004 with an initial allocation to hedge funds, Mr. Tajima said. It wants to double the share of private equity to about ¥2 billion, while studying the possibility of infrastructure investments, he said.
Still, the pace of investment growth in infrastructure assets may be slow, said Masashi Toshino, an analyst who covers pensions at Daiwa Fund Consulting in Tokyo. Such assets tend to be less liquid, global economic growth may falter, and there is a lack of projects at home for Japanese investors, he said.
“Investors are reluctant to take any country risk at this time, so it may take a while to see any significant increase in infrastructure investments,” he said.
To reduce country risk, Nomura is teaming up with Nippon Export and Investment Insurance, a government-backed agency that will insure against country risk related to investments, said Toshio Sonoyama, the head of project finance in Nomura's asset finance strategy department in Tokyo. Mr. Sonoyama declined to elaborate on details as the fund is still in the planning stage.
“Infrastructure investments are attractive because as long as there is economic growth, there will always be demand,” Mr. Sonoyama said. “They generally offer long-term steady cash flow and low correlation with traditional asset classes such as equities.”