Execs point to Abenomics as reason for risk posture

Updated from print

Pensions & Investments' ninth annual global pension symposium in Tokyo, under the banner this year of “derisking vs. risk taking,” found Japan's public and corporate pension funds staking out ground on opposite sides of the risk spectrum.

Public pension funds, led by Japan's ¥141 trillion ($1.17 trillion) Government Pension Investment Fund, continue to execute an unprecedented shift into risk assets this year — principally domestic and overseas equities — from Japanese government bonds, even as corporate pension funds trim their equity holdings.

At the conference, held Nov. 10-11 at the Ritz Carlton Hotel in Tokyo, both sides traced their current views on risk to the aggressive economic stimulus measures pursued by Prime Minister Shinzo Abe since his party's sweeping electoral victory at the end of 2012.

On the conference's final panel discussion on Nov. 11, Atsushi Tenda, the GPIF's director of investment strategy, said not having sufficient funding to cover the public pension fund's liabilities might be the “starting point to think about risk.”

GPIF executives have cited Mr. Abe's pledge to engineer a return of modest inflation, after more than a decade of deflation, as a central reason for abandoning the fund's long-standing allocation of more than 60% to Japanese government bonds in favor of a higher-risk, higher-return asset mix.

Over the 12 months through June 30, GPIF's allocation to domestic bonds has dropped 12 percentage points to 38%, while domestic stocks and international stocks added 6 points each to 23% and 22% respectively.

Japan's corporate pension funds, after heady gains by Japanese stocks over the past three years, have seen their funding levels continue to improve, noted Kiyoshi Murase, president of the Tokyo-based Pension Fund Association.

The Pension Fund Association's latest data show 58.5% of Japanese corporate defined benefit plans with funding levels of more than 120% at the end of 2014, up from 35.9% the year before. The proportion of DB plans with funding levels of less than 100%, meanwhile, dropped to 1.9% from 5.9%.

That's “thanks to Abenomics,” noted Kengo Torii, group manager, investment group, with Denso Corp.'s ¥450 billion pension fund, who spoke on a panel discussion on investments in illiquid asset classes.

The revival of Tokyo's stock market has come as a windfall for pension funds that, for the most part, had slashed their targets for investment gains to around 2% or so over the past five years.

As a result, corporate pension funds appear more inclined to take risk off the table at this point than add risk, noted Masanao Tsuda, senior corporate managing director with Nomura Asset Management Co. and global head of the firm's investment and research division, who spoke on the conference's final panel discussion.

Data from the Pension Fund Association, which serves as both a pension industry advocacy group and one of the country's largest pension funds, with 12.7 trillion yen in assets as of March 31, showed corporate DB allocations to domestic stocks slipping to 12% at the end of 2014 from 13.3% two years before. The benchmark Nikkei 225 index was surging 63% in that period, suggesting considerable allocation shifts to other asset classes.

Corporate pension executives at the conference revealed little appetite for more exposure to domestic stocks. An executive with one corporate fund, who declined to be named, said his fund has doubled its fixed-income allocations in the past year while halving its equity allocations.

Corporate pension funds, meanwhile, have likewise moved to lower their holdings of Japanese government bonds.

With corporate pension funds facing growing net benefits payouts in coming years and Japanese government bonds offering negative yields, Mercer is advising clients to shift into cash from JGBs as the simplest, least expensive way to prepare for that eventuality, said Nobuo Ohtsuka, a Tokyo-based principal and head of investment consulting with Mercer Japan.

Pension Fund Association data show the combined cash allocations of corporate defined benefit and multiemployer plans rising to 6% as of March, 2015, from 4.5% the year before.

“Some of our clients have allocated 10% of their portfolios to cash,” or cash equivalents, such as short term domestic bonds, said Mr. Ohtsuka, who noted reports of some large pension funds holding considerably more.

If public and corporate pension fund executives were of opposite minds on publicly listed equities, there seemed more room for overlap on other topics covered at the conference, such as smart beta strategies, multiasset strategies and alternatives.

Mr. Tenda said the GPIF is still in the process of hiring professionals that can help the giant fund add alternatives investments, which at present consist of an infrastructure investment that amounts to 0.05% of its portfolio.

Likewise, Masayuki Tashiro, Tokyo-based manager, asset management section I, with the ¥4.2 trillion Promotion and Mutual Aid Corporation for Private Schools of Japan, said his fund is studying its options for “diversifying our risk” with alternatives that are less correlated with traditional assets, although it's not at the point of making concrete plans.

Corporate pension funds are farther along that track. Denso's Mr. Torii said his fund is reviewing its asset allocation now for the fiscal year starting in April 2017, and by the end of 2016 could opt to boost its 5% target allocation to illiquid assets such as real estate and infrastructure to between 10% and 20%.

That expansion would come mainly from its current allocations of 57% to fixed income and 18% to equities. The remaining 20% allocation at present is for a guaranteed investment contract with an annual yield of 1.2%.