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

Apr 23, 2012

Japanese pension funds adjust their portfolios to respond to the rapidly changing market environment


Tokyo, 23 April 2012: JPMorgan Asset Management (Japan) Ltd. today released the preliminary results of a survey conducted earlier this year to find out about changes in Japanese pension funds' portfolios from FY2011 to FY2012 and the direction they intend to take in the future.

According to the results of the survey, Japanese corporate pension funds still maintain their conservative stance towards risk taking, focusing more on mid- and long-term trends, such as higher market volatilities and declining expected returns from developed country equities, rather than shorter-term movements including the rise in equity markets from the end of last year.

To be more specific, they have continued to decrease their allocation to developed country equities, especially Japanese equities. At the same time, taking into account the European credit crisis, within their fixed income portion they have been shifting assets away from developed country sovereign bonds into various types of fixed income asset classes that are expected to generate higher income gains. They have also continued to increase their allocation to alternatives and to the general accounts of life insurance companies *¹. In terms of currency, eyeing the long-lasting yen appreciation, they have raised the ratio of currency hedging. Meanwhile, they are still increasing exposure to emerging market equities and debt, having maintained high expectations for the economic growth of emerging market countries.

*¹The general account of life insurance companies is a minimum return guaranteed stable product offered by life insurance companies.

The key findings are as follows:

1. Recognition of market environment

Graph 1 Recognition of market environment

  • Many pension funds are moving their assets away from equities towards alternatives, due to concerns over higher market volatility and lower expected returns from developed market equities.
  • Considering the developed countries' credit crisis, many are shifting assets away from developed country sovereign debt into emerging market debt and corporate bonds.
  • Being concerned about continuous yen appreciation, more and more pension funds have raised their currency hedging ratios.
  • As many pension funds have high expectations for economic growth in the emerging countries, they are continuously increasing their allocation to emerging market equities and debt.

2. Changes in asset allocation and future direction

Graph 2 Changes in asset allocation

  • The data shows a continuing move away from developed market equities, especially Japanese equities. This tendency is more noticeable among multi-employer pension funds this year. In the backdrop, there is a trend to lower their discount rates, in other words, their target returns.
  • They continue to increase their allocation to alternatives, general accounts and currency-hedged international bonds.
  • Going forward, they are planning to decrease their allocation to developed market equities, especially Japanese equities, and increase their allocation to alternatives, emerging market investments, general accounts and currency-hedged international bonds.

3. Introduction of various non-traditional investment strategies

Graph 3 Percentage of pension funds that introduced non-traditional investment strategies

  • In the fixed income space, various types of non-traditional investment strategies have been added to their portfolios, aiming for diversification. For example, within the domestic bond area, short-duration bonds, long-duration bonds and corporate bonds have been added, along with emerging market debt, high-yield bonds and bank loans within the international bond field.
  • In the equity space, more than half of pension funds have already invested in emerging market equities, while at the same time non-traditional strategies such as long-short equities, fundamental index, minimum variance and concentrated portfolios are more widespread.
  • In the space of alternatives, absolute return strategies, mainly hedge funds, are now included in almost 70% of pension fund portfolios. Meanwhile, other types of alternatives, such as PE, real estates, REIT, infrastructure and insurance-related strategies, are also spreading among Japanese pension funds.

4. Change of currency hedge ratios

Graph 4 Change of distribution of currency hedge ratios

  • Taking into consideration the long-lasting yen appreciation and increasing allocation to foreign currency-denominated assets, the ratio of currency hedging continues to rise.
  • Especially, the ratio of currency hedges tends to be higher with international bonds. This trend may indicate pension funds’ intention to reduce downside risk attributable to currency fluctuations.

In addition to the above mentioned portfolio management-related topics, this year’s survey also included questions about their stance towards the so called ‘AIJ problem’. The survey results indicate a high level of interest, and revealed that many pension funds plan to take such countermeasures as strengthening their governance system, reviewing their manager selection process, utilising outsourcing services such as consultants more thoroughly, and limiting the universe of candidate managers.

Hidenori Suzuki, head of the Strategy Group at JPMorgan Asset Management (Japan) Ltd., who spearheaded the survey, said, “Most Japanese pension funds appear to maintain a cautious attitude in view of the equity price declines and rapid yen appreciation during the last year. What has drawn attention most is that many multi-employer type pension funds, which had been maintaining aggressive portfolios until last year, have shifted into taking a more conservative stance, and have lowered their target returns, decreased their allocation to equities and raised the ratio of their currency hedges.”

“In addition, in view of the debt crisis in European countries, they have re-acknowledged sovereign risk and plan to diversify the fixed income portion of their portfolios, moving away from sovereign bonds. The survey results suggest that Japanese pension funds are adjusting their portfolios flexibly to respond to the rapidly changing market environment, and aim to secure the necessary returns at the same time as controlling risk.”

NB: The survey was conducted from early March to April 2012. For the preliminary findings announced in this press release, a total of 126 Japanese pension funds participated, including 87 defined-benefit corporate pensions, 36 corporate employee pension funds and three “other” pension funds. A report on the final findings is expected to be compiled in late May.


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