Japan's PFA Pressured to Boost PE Allocation

(March 10, 2011) — The chief investment officer of Japan’s Pension Fund Association (PFA), which oversees $130 billion in corporate retirement funds, has said that it must assume additional risk due to a market of low returns.

According to the Wall Street Journal, the fund plans to take on additional risk largely by pumping up its private equity investments, which now account for less than 1% of its entire portfolio. “We need to lessen our dependence of beta return,” Daisuke Hamaguchi, the CIO of the PFA, told the WSJ. “We are making private equity investments and hedge fund investments in an effort to make more alpha return.”

Japan’s PFA has a history of being on the conservative side, with 40% of its assets in low-yielding yen-denominated bonds. The fund also has one-fourth of its portfolio in foreign equities, of which 10% is invested in emerging market stocks, the WSJ reported.

The PFA’s decision to pump more money into riskier investments mirrors the approach of Japan’s $1.4 trillion Government Pension Investment Fund’s (GPIF). In October, the GPIF said it would pick both active and passive managers to invest in emerging markets for the first time as it faces mounting shortfalls and an aging population. The pension is traditionally a conservative investor with more than two-thirds of its assets in Japanese government bonds. As of June, about 9% of the GPIF’s total assets, or 10.6 trillion yen out of 116.8 trillion yen, were held in foreign equities.

More recently, Chairman Takahiro Mitani of the GPIF has called on the government to help rescue the nation from its growing debt before it reaches a critical point. “We are not thinking of changing our basic portfolio as a result of ratings changes by credit rating companies,” Mitani told Reuters, reiterating the scheme’s belief that the fund must continue to diversify its portfolio by increasingly investing in emerging markets. In the six month period to September, the performance of GPIF, which has an asset size larger than both the Canadian and Indian economies, was negative 1.5%, compared with a positive 7.91% for the entire financial year that ended last March.

The statements by Mitani over Japan’s burgeoning public debt, amounting to double the size of its $5 trillion economy, follows the decision by Moody’s Investors Service to change the outlook on Japan’s Aa2 sovereign rating to negative from stable. It also comes about a month after Standard & Poor’s downgraded the government’s sovereign debt rating, with both Moody’s and the S&P asserting long-term fiscal unsustainability of the country’s debt.