Translation of a survey article originally published in AL-IN magazine vol. 54, December 2019.
AL-IN, a magazine for institutional investors in Japan, conducted its first survey about the use of multi-asset strategies among its corporate pension subscribers in 2013. Since then, implementation of such strategies has varied with changes in asset classes, allocations, and investment approach.
The 4th and latest survey was conducted in November 2019 with 104 corporate pensions responding. What does a multi-asset strategy mean now and how does it address today’s more challenging investment landscape?
Part 2 (of 2) of the survey’s findings appears below.
Why do Japanese corporate pensions employ the multi-asset strategy?
What reasons do investors give for adopting the multi-asset strategy? In Chart 3 (multiple answers allowed), the top three responses chosen — mostly unchanged from the previous survey — were "to curb downside risks" chosen by forty-four investors (67.7%), "to facilitate quick changes in allocation" by thirty-two investors (49.2%), and "to diversify benefits of asset allocation" by twenty-five (38.5%). On the other hand, "to earn absolute returns" dropped from 2nd place in the 2017 survey with thirty investors (54.5%) to 4th place with twenty-four investors (36.9%).
Given that curbing downside risk was the most common reason for adopting a multi-asset strategy, what level of risk are investors comfortable with? Twenty-two investors (34.4%) said 5%, eleven (17.2%) said 3%, seven (10.9%) replied 2%, and seven more said 6%.
What rate of return do they expect? Thirty-one investors (48.4%) said 3%, ten (15.6%) said 5%, nine (14.1%) replied 4% and nine said 2%. In other words, investors want stability in exchange for relatively low risk-return levels.
Will corporate pensions change their multi-asset strategies?
Japanese corporate pension funds have more than 10 years of experience with multi-asset investment. An assessment is due. Stock markets grew more volatile in 2018, resulting in some losses among multi-asset investors. Are corporate pensions considering abandoning their multi-asset programs as a result? More than half, thirty-three (56.7%), said they had "no plan to cancel," while twenty-three (39.7%) had cancelled one or more strategies, and two pensions (3.4%) say they are planning to cancel. Compared with the previous survey, in which 36.4% answered either "cancelled" or "planning to cancel," more investors moved to cancel.
Why? Excluding investors with "no plan to cancel", the most common response was "dissatisfaction with/anxiety about returns" among twenty-three (50.0%), followed by "dissatisfaction with the effects of dynamic asset allocation" cited by twelve (26.1%) investors.
So where did the money go? With multiple responses allowed, most investors said "other multi-asset strategies" with ten investors (29.4%), followed by "hedge funds" with seven (20.6%), "private debt" with five (14.7%), "domestic/foreign bonds" and "domestic/foreign stocks" with four (11.8%) each, and "real estate" and "infrastructure" with two (5.9%) each.
Although most respondents claimed to have migrated to "other multi-asset strategies," most did not have a particular allocation for multi-assets. It seems that Japanese corporate pensions reserve a certain portion of their portfolios for multi-assets even though they may not specifically designate it as such.
How do corporate pensions plan to use multi-assets in the future? In Chart 4, thirty-seven investors (35.6%) said they would "maintain the status quo," twenty (19.2%) said they would "increase products or allocation ratio," and five (4.8%) vowed to "decrease products or allocation ratio." Forty-two (40.4%) reported "no plan to adopt" multi-assets. You may conclude that more than half of Japanese corporate pensions have a relatively positive view of the multi-asset strategy, while 40% remain unconvinced.