Thinking of Investment: Going with advanced diversified investment

Our fund invests in various products, allocated by long, middle, and short terms.  Our current portfolio includes nearly 40 products, mostly alternatives, in which we have invested about JPY 500 million each.  The largest allocation is Chinese long-short strategies.  Others include consumer loans, foreign trade financing, real estate related funds, relatively shorter loans, and long-shorts in US and European financial corporations.  Although most of our assets are in alternative investments, we don’t currently invest in bank loans, direct lending, small allocation in private equities (PEs) and infrastructures.  We shift away from areas when they become popular with a majority of investors.  Once that popularity wears off, we’ll reconsider investing there.

We pursue an advanced, diversified investment strategy to achieve a portfolio resembling the endowments at universities like Harvard and Yale.  We don’t rely on stocks due to of their high volatility.  We avoid bonds because of negative interest rates.  Instead, we look to alternative investments.

In an exceptional move, we recently bought stocks -- foreign currencies with a hedge, to avoid currency risks, stemming from COVID-19 – in accordance with our stock investment policy of buying on a 7% dip and selling at a 7% rise from previous buying/selling points.

We use Aksia for their research on alternative investments.  Alternative players like Aksia, Albourne, and MCP can partner well with Japanese asset managers, but not usually with corporate pension funds.  In our case, we don’t require comprehensive consultation.  We don’t put assets in equities or bonds; we can perform ALM (asset/liability management) ourselves, since I’m an actuary.  Aksia’s role for us is less about asset management, and more about interpreting each manager’s skill with our investment targets to better understand what he/she might be thinking.  Our independent direct research is also important.  For example, with real estate firms, you can gauge the levels of value-up motivation/efforts by knowing how closely they’re managing collateral, if they’re working hard to maintain tenants, provide good upkeep, and so on.

Our investment policies are designed to reflect the intentions of our member companies.  We conduct polls to gauge the thoughts of our membership; the results inform our management policies, which aim to establish a framework for continuous and stable diversified investment.

Management History: Lots of fun in asset management

I became enthralled by modern portfolio theory in my university days.  It got in my blood and seemed to take hold.  As a sophomore, I decided to work in long-term stock investment and started to invest in the equity market.  My career began at Sumitomo Life, where I managed long-term stock investments.  I then moved to Russell Investment and was in charge of asset management consultation for corporate pensions, and asset liability as an actuary.  I enjoyed working at Sumitomo and Russell very much because they allowed me to do whatever I wanted, so long as I continued to deliver results.

Around 2000, I started paying attention to alternatives, back when few people took notice of them.  Even in the US, alternatives were not very popular among institutional investors.  I started to recommend them to corporate pensions.  I thought stocks were too volatile and dangerous for pension funds to rely on so heavily.  At the time, stocks made up 40–55% of employee pension fund portfolios in Japan, and around 60% in their US counterparts.  Well-balanced alternatives in PEs, real estate, and hedge funds should be included in those portfolios, I thought.

In 2008, I became an independent fund manager/consultant.  My father passed away at 45 years old and I had decided when I reached that age I would step back and spend more time enjoying life.  A month after doing so, the Financial Crisis precipitated by the Lehman Brothers bankruptcy hit.  One of Russell’s clients, Okayama Metal and Machinery Pension Fund (now known as West Japan Machinery Pension Fund), faced the difficult possibility of dissolution.  Since OMM was based in my hometown, they asked for my help in weathering the crisis.  With dissolution already on the table, I was free to try almost anything to keep the fund afloat, and I joined OMM in 2009.  Since then, with sound yearly returns based on solid ALM, the fund’s financial position has become quite sound.  My goal for this pension fund is to put a structure in place that can maintain a sophisticated, diversified investment.

I would like to see Japanese corporate pension funds become more sophisticated.  Currently, pension funds in Japan are positioned as general investors, run by directors who are not even required to submit a CV, much less be qualified for alternative investments.  I believe corporate pension funds should be registered as qualified investors, which would allow them to act like venture capitalists, as the Japanese government would like.

Yoshisuke Kiguchi

Chief Investment Officer
West Japan Machinery Pension Fund