Japanese institutional investors seeking greater returns and diversity are turning increasingly to private assets. On June 4, 2020, IJ reported results from a summer 2019 survey regarding private asset investment among Japanese corporate pensions. The results below are from a summer 2020 survey of 102 asset owners by AL-IN, a magazine for institutional investors.

Majority of corporate pensions invest in private assets

Most notable among the latest survey results was that now more than half of Japanese corporate pension funds (58.8%) have invested in private assets (PAs) versus 43.9% in the 2019 survey.  Roughly speaking, the larger the fund, the larger the allocation to PAs. 

Among the funds who have invested in PAs, the most common expectation is a “lower degree of correlation with movements of publicly traded securities”, although they don’t believe PAs are cheaper than high liquidity assets.  (To compare with the 2019 survey results, see: https://investmentjapan.jp/research/1193/)

CHART 1: Investment in private assets by fund

CHART 2: What do investors expect from private assets?

Among those funds already invested in PAs, portfolio diversification through active use of alternative assets is common and the larger the fund, the lower the ratio of investment in domestic bonds.  On average among all funds, PAs allocation ratios higher at 9.9% than traditional non-PA alternatives, such as hedge funds, at 9.0%.

CHART 3: Average portfolio by fund size

Real estate assets preferred

What types of PAs do Japanese pension funds prefer?  Real estate assets, especially privately offered closed-end real estate funds and private REIT, are the most popular category of PA.  While private equities are probably the most popular PA category abroad, domestic investors seeking income gains prefer PAs with a lower risk/return ratio, mostly core real estate assets.

 

CHART 4: Which private assets do you invest in?

Future issues and directions of Japanese PA investments

This survey asked respondents who don’t invest in private assets why they don’t.  The most common answer was “many limitations on their liquidity”, unchanged from the 2019 survey, followed by “expensive unit price”, “difficult to get assent from a sponsor company, board of directors, or a representative meeting” and “unable to deal with current administrative capacity”.  These issues are not insurmountable.  Fund managers can reduce the “expensive unit price” by devising ways to offer smaller units.  To overcome the greater issue of improving PA liquidity, secondary markets need to be developed and expanded.

Although it will take time and effort to solve these and other problems, Japanese corporate pension funds will continue to grow their investment in PAs.  In December, AL-IN held a PA investment seminar and took a quick survey of participants’ plans to increase/decrease their PA investment ratios in the future.  Forty percent of respondents said they would increase, 47% would maintain the status quo, and none said they would decrease investment in PAs.