Poor Investment Expertise Drives Japanese Public Pension Domestic Bias

A huge majority of Japanese public pensions have no investment experience, driving home-country bias in the region, says Sadayuki Horie, senior researcher at the Nomura Research Institute.

(March 30, 2012) — A lack of investing experience among managers has led to an extreme amount of home-country bias in the public pension Asian market, according to Sadayuki Horie of the Nomura Research Institute of Japan.

Horie told aiCIO that along with a lack of investing experience, governmental budgetary pressures, an “amateur” investing approach, and a lack of knowledge of the foreign market fuels home-country bias. On average in the Japanese market, he says, 20% of the average portfolio is allocated to the foreign market with 80% of portfolios generally skewed toward the Japanese market — a skew driven by the fact that public pensions have their hands tied with rising liabilities.

“We recommend to public pensions to invest in the emerging market, but they are still fearful of taking on the risk,” Horie says.

Furthermore, he notes that governance issues adds to the home-country bias story in Asia. “Public pensions in Japan often lack a board of trustees — it’s ridiculous from a governance perspective,” he says, adding that budgetary governmental pressures force internal management and passive investing.

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“In Japan, the government places harsh limits on fee control, so pensions can’t hire external people — the mindset is that they don’t want to pay higher fees for potentially higher returns. This is why the investment in Japan and in many Asian countries is very amateur and not professional…Alternatives do not exist among public pension funds in Japan,” says Horie, due to its greater complexity and the greater resources investing in the asset class would require.

Horie’s comments come as a recent survey showed that the world’s largest pension — the Japan’s Government Pension Investment Fund — and others in the country are led by inexperienced investing professionals. According to a government survey by the Ministry of Health, Labour and Welfare, about 90% of managers under Japan’s employee pension system have no prior experience overseeing assets. The study showed that those who had worked at financial institutions made up about 3%. Meanwhile, only 2% of fund managers at the 558 retirement plans under the country’s employee pension fund system were certified as analysts at a brokerage or financial planners

The survey, obtained by Bloomberg, was commissioned after AIJ Investment Advisors Co. was found to lose client money, the news service reported.

Investors should seek emerging stocks, bonds and currencies to capture the high returns associated with emerging-market growth, with better risk management potential.

(March 30, 2012) — The economic growth and newfound fiscal strength of many emerging countries have created a dilemma for investors, according to a whitepaper by AllianceBernstein that agues the case of an active, unconstrained, multi-asset strategy.

The paper asks: “Is it possible to reduce emerging markets’ volatility without sacrificing return potential?”

Yes, according to AllianceBernstein. Investors should seek emerging stocks, bonds and currencies.

It continues: “An investor could invest in these asset classes separately, but we believe that integrating them in one dynamically managed portfolio can generate much better risk/return potential than a stock-only strategy. An emerging-markets multi-asset strategy can provide multiple sources of return potential, and more ways to mitigate risk. Ideally, it can provide the potential for returns similar to a stock-only strategy, but with significantly less risk.”

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According to Morgan Harting, who manages the firm’s emerging market multiasset portfolio research, a portfolio with emerging stocks, bonds and currencies, managed in an active strategy, can capture a greater set of opportunities amid less volatility. “We’ve had this fund for about a year, and it has done well during a volatile period,” Harting said.

Furthermore, Harting noted that corporate bonds in emerging markets have presented higher yields and better credit quality, as more and more bonds are being issued by emerging market companies — creating more of an active market. “That’s attractive to investors — pensions and insurance companies — who require more liquidity,” Harting said.