TOKYO: J.P. Morgan Asset Management releases its Japanese pension fund survey preliminary report

Apr 24, 2013

JPMorgan Asset Management (Japan) Ltd. today released the preliminary results of a survey conducted earlier this year to find out about changes in Japanese corporate pension funds' portfolios from FY2012 to FY2013 and the direction they intend to take in the future.

According to the results of the survey, a large number of pension funds are concerned about extremely low interest rates (married with concerns over future rises in interest rates) brought about by Abe-nomics and the BOJ's extreme easing policy, as well as higher market volatility. To tackle these issues, some are investing in a wider range of assets and strategies. By taking additional risks selectively while at the same time carefully controlling overall portfolio risk through diversification, they aim to achieve their required returns.

In this environment, most pension funds are maintaining their current target returns and target risks unchanged. Since the financial crisis pension funds had continued to decrease both target returns and risks, but now this trend may be coming to a halt.

In terms of asset allocation, the trend of increasing their allocation to domestic bonds seems to have reversed, as funds are now decreasing allocation, eying the extremely low interest yields. Meanwhile, the trend of increasing allocation to foreign bonds and alternatives are becoming more pronounced.

Although they intend to decrease allocation to domestic equities, their actual allocation is still larger than their original target. In addition, the ratio of active management has increased in domestic equities as well as in foreign bonds, aiming to accumulate returns through active investment.

Pension funds that have invested in non-traditional assets or strategies have increased rapidly, so that they may achieve required returns by gaining excess returns from new sources.

Reflecting the increase in foreign-currency based assets and strategies, the ratio of currency hedging continues to rise.

In summary, to respond to the extremely low interest rate environment, many Japanese corporate pension funds are changing their investment attitude. Contrary to last year's survey, in which they were single-mindedly decreasing their risk, this year's survey found that they are more actively investing in a broader range of strategies, through selectively taking risks with medium risk/medium return strategies, at the same time as controlling their overall portfolio risk through diversification.

The key findings are as follows:

1. Recognition of market environment

< Graph 1 Countermeasures against market environment >

  • Pension funds intend to increase assets with larger income cash flows, as they are concerned about "extremely low interest rates" and "accumulated debt problems among developed countries."
  • Reacting to "higher market volatility", pension funds are apparently seeking to lower portfolio risk by further diversifying their portfolio. Many pension funds are moving their assets away from equities towards alternatives, due to concerns over higher market volatility.

2. Changes in target return and risk among pension funds

  • Most pension funds are keeping their current target risk. This suggests that the long-time declining trend of target return and risk is stabilizing.

< Graph 2 Changes of average target return and risk >


3. Changes in asset allocation

< Graph 3 Changes in asset allocation >


< Graph 4 Difference between target and actual allocation (at the end of Mar 2013) >

  • The long-time trend of increasing allocation to domestic bonds has reversed and has now started decreasing due to the extremely low level of interest rates.
  • The trends of increasing allocation to foreign bonds and alternatives are becoming more pronounced.
  • Although they intend to decrease allocation to domestic equities, their actual allocation is still larger than the original target. Allocation to alternatives is also larger than the original plan.

4. Introduction of various non-traditional investment strategies

< Graph 5 Percentage of pension funds that have introduced non-traditional investment strategies>

  • The number of pension funds that have already invested in non-traditional assets and strategies has increased rapidly in view of the extremely low interest rate environment.
  • In the bond space, emerging bonds, currency-hedged foreign bonds and bank loans are spreading rapidly, and in the equity space, the same is true for concentrated equities and emerging equities.
  • In the alternatives space, a broad range of products are also expanding remarkably.

Hidenori Suzuki, head of the Strategy Group at JPMorgan Asset Management (Japan) Ltd., who spearheaded the survey, said, "Considering the timing of this survey, the BOJ's recent drastic easing policies have only partially been reflected in this survey's results. In the lower interest rate environment, it is only natural that Japanese corporate pension funds transfer more of their assets from safer assets such as JGBs to risk assets such as foreign bonds and alternatives. This new trend could continue as long as the BOJ maintains their aggressive easing policy stance."

NB:The survey was conducted from early March to April 2013. For the preliminary findings announced in this press release, a total of 128 Japanese pension funds participated, including 93 defined-benefit corporate pension funds, 32 corporate employee pension funds and three "other" pension funds. A report on the final findings is expected to be compiled in late May.

J.P. Morgan Asset Management

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