(April 26, 2013) — Surprising news from the Land of the Rising Sun: Japanese pension funds – notoriously conservative in their investment strategies – are decreasing their allocation to domestic bonds for the first time in years, favouring overseas bonds for their better yields.
Preliminary results from JPMorgan Asset Management’s survey of 128 Japanese pension funds, shared with aiCIO, showed a large number of pension funds are concerned about extremely low interest rates (combined with a fear of future interest rate rises) brought about by Abe-nomics and the Bank of Japan’s (BoJ) extreme easing policy, as well as higher market volatility.
As a reminder, Japan’s Government Pension Investment Fund, the world’s largest public pension, held 64% of its assets in domestic bonds, 11% in domestic stocks, 9.0% in international bonds, and 12% in international stocks, with the remainder in short-term assets, as of September 2012.
This, combined with the country’s baby boomers edging ever closer to retirement, is leading some to take the hitherto unusual action of investing in a wider range of assets and strategies.
In asset allocation terms, the trend of increasing their allocation to domestic bonds seems to have reversed, as funds are now decreasing allocation, driven by the extremely low interest yields. Investments in domestic equities have dropped too.
The freed up capital is being spent in foreign bonds and alternatives. In addition, the ratio of active management has increased in domestic equities and foreign bonds, as schemes seek to accumulate returns through diversification and active investment.
The pension funds that have invested in non-traditional assets or strategies have done so at a rapid pace and the ratio of currency hedging also continues to rise — handy since cash holdings have increased on average from 6% of portfolios in 2009 to 10.5% in 2012.
Hidenori Suzuki, head of the strategy group at JPMorgan Asset Management in Japan, said this trend was likely to continue, given the survey was taken before the BoJ’s recent drastic easing policy, announced earlier this April.
“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,” he said.
“This new trend could continue as long as the BOJ maintains their aggressive easing policy stance.”
Last year saw many Japanese funds dash into gold in an attempt to protect their already struggling funds from further market shocks and rising inflation. But it seems protecting their existing pots is no longer enough – now they’re pushing for returns.
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