Japan pensions set sights on secondaries and funds of funds

Secondaries and funds of funds are proving the most popular strategy choices for the nation's corporate pension funds, according to a survey by JPMorgan Asset Management.

Japanese corporate pension funds are continuing to shift their capital away from traditional assets and toward alternatives including secondaries and funds of funds, a survey by JPMorgan Asset Management has found.

The report, which was conducted from early March to May 2016, surveyed 127 Japanese pension funds, including 116 defined benefit (DB) corporate pension funds and nine corporate employee pension funds.

Over the next year, secondaries and funds of funds will prove the most popular routes to access private equity with the pension funds surveyed identifying three mandates of each strategy to be allocated in the coming year.

At the end of March 2016 their allocation to alternatives reached a record high of 14 percent as investors sought “stable” returns and increasingly diversified revenue sources.

Other winners among the asset classes include infrastructure and private debt, with 7 percent of pension funds saying they would increase their exposure to the former and 6 percent to the latter. None of the pensions said they would dial back their exposure.

Around 4 percent of funds said they would raise their allocation to private equity, while 1 percent said they would reduce it.

Among the 127 pensions surveyed, six new private equity fund of funds mandates and one secondaries mandate were awarded in the last two years.

The introduction of a negative interest rate policy by the Bank of Japan in January spurred 49 percent of respondents to either change or consider changing their investment policies. Around 80 percent of respondents consider the investment environment to have changed due to the introduction of negative interest rates.

The survey noted that while the funds’ countermeasures were not “uniform”, they are mainly considering lowering their allocation to domestic bonds and increasing their exposure to alternatives.

On Tuesday the Financial Times reported that yields across the Japanese Government Bond market fell below 0.1 percent for the first time as the fallout from the Brexit referendum reverberated across the globe.

The JPMorgan survey found that as at the end of March, around 70 percent of DB corporate pension funds were invested in alternative assets. Among these pensions, the average allocation to alternatives was 18.8 percent, second only to domestic bonds.

The survey also looked at the way funds allocate their assets based on target return, and found that the higher a fund’s target return, the higher its allocation to alternatives. Those targeting more than 4 percent had an alternatives allocation of more than 25 percent, while those targeting less than 2 percent had an allocation of just 12.5 percent.