The Bank of Japan's negative interest rate policy this year could push Japanese corporate pension funds to allocate more to alternative investments at the expense of domestic bonds, said a recent J.P. Morgan Asset Management survey.
The survey — based on interviews between March and May of executives overseeing 127, mostly defined benefit, corporate funds — showed a growing pursuit of “stable” returns lifting respondents' asset-weighted allocation to alternatives to a survey record 14% for the fiscal year ended March 31.
While the respondents' targeted allocation to domestic bonds tumbled to 30% from roughly 38% over the four years through March 2015, for the latest year actual allocations stabilized, edging up to 28% as of March 31, 2016, from 27.5% the year before.
But 49% of respondents cited the introduction of negative rates on Japanese government bonds from January as an impetus to either change of consider changing their investment policies.
The diminished attractiveness of domestic bonds means that DB corporate pension funds are considering a “lower allocation to domestic bonds” and “higher allocation to alternatives,” a JPMAM news release said.
Meanwhile, the market turmoil sparked by the U.K.'s Brexit vote pushed the yield on the 10-year Japanese government bond further into negative territory this week. Late Tuesday in Tokyo, 10-year JGBs were yielding -0.229%.
With corporate pension fund executives increasingly looking to real estate, infrastructure and private debt for the safe, steady income sovereign bonds once provided, “going forward, a drop in domestic bond exposure well below 30%” can't be ruled out, according to the news release.
Of the 127 respondents, roughly 70% were investing in alternatives. For that 70%, alternatives accounted for 17% to 18% of their portfolios, second only to a 27% weighting for domestic bonds.
Unlike Japan's biggest public fund, the $1.3 trillion Government Pension Investment Fund, those corporate funds haven't boosted allocations to domestic stocks, with their target dropping to 7.4% for the fiscal year ended March 31, from 8.5% the year before.
The GPIF, by contrast, more than doubled its target allocation to domestic stocks at the end of October 2014 to 25% from 12%.