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November 25, 2019 12:00 AM

Search for yield in low-return future dominates conference

Douglas Appell
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    Greg Medcraft
    Guillermo Gutierrez/Bloomberg
    Greg Medcraft said some investors see prospects of a low-return environment lasting ‘for decades.’

    Corporate pension fund executives are grappling with the prospect that the challenges of building portfolios with negative yielding local government bonds and high valuations elsewhere could persist for the foreseeable future.

    At Pensions & Investments' 13th annual Japanese Global Pension Symposium, held in Tokyo Nov. 12-13, Greg Medcraft, director of the Organization for Economic Cooperation and Development's directorate for financial and enterprise affairs, set the tone in his opening address, noting that investors expect the "lower-for-longer" environment now in global capital markets to prevail "for years to come, possibly for decades."

    Against the backdrop of negative yields on the benchmark 10-year Japanese government bond, the conference found pension fund executives looking for options to restructure the segments of their portfolios designed to provide support in a risk-off environment.

    More than one pension fund executive at the conference reported getting out of local bonds entirely since the start of 2019.

    The latest data from Greenwich Associates showed Japanese corporate pension fund allocations to local bonds dropping to 16.6% at the end of 2018 from 18.3% the year before and 26.6% five years ago. Allocations to domestic and overseas stocks, meanwhile slipped by 20 basis points to 10.5% and 50 basis points to 16.1%, respectively, reflecting the year's fourth-quarter sell-off in global stock markets.

    Asset segments posting gains in 2018 included cash, up 1 percentage point to 5.1%; overseas bonds, up 80 basis points to 19.4%; and private markets, including real estate, private equity and infrastructure, up 60 basis points to 8.4% Allocations to hedge funds sagged to 6.1% from 6.4%. The rest was in insurance company general account/type one separate account products.

    Panel discussions over the two-day gathering focused on other means of obtaining yield or downside protection.

    Jason Oram, a partner and fund manager with London-based real estate investment firm Europa Capital, contended that institutional investors shying away from Europe now on account of soft economic conditions could be overlooking opportunities on tap from population shifts within the region boosting real estate markets now in at least 20 metropolitan areas.

    Benjamin D. Treacy and Sean Walker, Fidelity Investments' institutional portfolio managers, discussed the charms of multisector fixed income and low-volatility equity exposure, respectively, as a means of securing a balance of gains in up markets and resilience in down markets.

    With continued shifts in allocations to private markets, David J. Holmgren, chief investment officer of the $3.3 billion retirement and endowment portfolio of Hartford HealthCare, described how his team's efforts to go the extra mile in forging partnerships with private markets investment firms — over and above the rigid, contractual relationships typical of asset owners and their "vendors" — has paid off in terms of getting access to those firms' best ideas.

    But one corporate pension fund executive, who declined to be named, pointed to the local practice of rotating executives responsible for overseeing corporate pension funds every few years as an added challenge when making investments that lock up retirement money for periods of seven to 10 years.

    And more than a year after a revision to Japan's corporate governance code called for steps to bolster the level of investment management expertise companies bring in to oversee their retirement assets, corporate pension fund executives at the conference suggested ample room for further improvement remains.

    With trust banks shouldering the burdens of managing most corporate pension funds in Japan, a poll of the roughly 200 pension fund executives attending the conference showed 43% said they had no dedicated investment specialists overseeing their plans. Another 26% said they have one investment specialist and 20% reported having two.

    Only 5% of respondents reported having no problems persuading their sponsoring companies to provide needed investment specialists — a mix of higher corporate governance hurdles and strained resources that left the head of one big Japanese corporate pension fund, who declined to be named, saying he favored hiring an outsourced CIO to replace him when he retired.

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