Japanese corporate pension funds are expected to increase their allocation to private equity as funds invest in less liquid assets yielding higher returns, said Akira Kunikyo, a Tokyo-based global market strategist at JP Morgan Asset Management.
Most of their allocations will be to domestic rather than foreign private equity funds, he said.
The majority of corporate pension funds are already investing in alternatives, in a move away from domestic bonds, Kunikyo said. Funds are also targeting direct investments, infrastructure and real estate.
“Alternatives are now the second largest growing asset class for Japanese corporate pension funds and this trend will continue through 2015,” he said, citing the JP Morgan Asset Management Japan Corporate Pension Funds Survey Report 2015. The report consulted about 100 domestic pension funds.
Over the course of 2013, corporate pension allocations to alternatives grew from 11.8 per cent to 12.5 per cent, according to the report.
Private equity is a favoured alternative asset class for corporate pension funds seeking higher returns, said Kunikyo.
As a percentage of overall asset allocations, private equity increased from 2.3 percent to 3.1 percent, from the beginning of 2013 to the beginning of 2014. This compares with real estate, which rose from 1.7 percent to 2.2 percent, and infrastructure, which moved from 0.3 percent to 0.6 percent over the same period.
Japanese corporate pension funds have a target return on their investments of between 4 and 5 percent, Kunikyo said. By investing in private equity they are achieving average returns of 8.4 percent, compared with a 5.6 percent return for real estate assets and 1.4 percent for infrastructure assets.
Their target returns are also very different to that of government pension funds, which are often much higher, he said. For this reason these funds also are seeking to diversify their asset allocation, Kunikyo said.
The $65 billion Federation of National Public Service Personnel Mutual Aid Associations, one of Japan’s ‘big four’ pension schemes is preparing to invest in alternatives for the first time, as reported by PEI.
The fund has issued request for proposals for external managers to present it with investment opportunities. It follows the Government Pension Investment Fund, a $1.1 trillion scheme that is currently hiring executives to oversee its alternatives allocation.