Japanese Corporate Pension Funds: Growing Risks for Emerging Asian Markets | Asset owners

Corporate pension funds in Japan struggle to identify best allocation strategies as reverberations of global disruptive events ripple through emerging markets in Asia, top pension funds say .

As China’s economy is tested by the shutdowns and general repercussions of the Covid-19 pandemic, as well as regulatory interventions that have rattled financial markets, other emerging economies in Asia are now also feeling the strain. the burn.

Despite this, many Japanese corporate pension funds say they intend to stay the course with emerging market equities, hoping for higher long-term growth, says Konosuke Kita, advisory director at Russell Investments in Japan.

Konosuke Kita

“It sounds risky, but on the other hand, the Chinese economy is expected to continue to grow over time. The judgment on whether pension funds should continue to invest in emerging markets [equity] is not easy. Some investors may quit and others may continue to diversify from the advanced economy,” Kita said. Asian investor.

He said more than 75% of emerging equity investments are in Asian countries, and many of them are likely to be affected by China. The extent to which China’s rebounds will have a huge influence on the value of Japanese corporate pension funds’ emerging markets strategy.

As Kita pointed out, equity returns in emerging economies were currently lower than in advanced economies during the 2010s.

WAITING FOR A NEW TREND

One corporate pension fund that sees many challenges in balancing this emerging market uncertainty is Kewpie Pension Fund, the corporate pension fund of the same name for the food maker best known for its mayonnaise.

Kosuke Okimori

Kosuke Okimori, its chief investment officer, manages two funds with a current total of 69 billion yen ($511 million) in assets under management.

He says markets always show more green lights than red flags.

“For us [Japanese corporate pension funds], it is very difficult to find an attractive asset class at the moment. I’m basically waiting for a new trend to follow,” Okimori said. Asian investor.

For example, he sees problems with fixed income securities overseas since hedging costs for Japanese investors could rise, wiping out the coupon, or annual interest rate, in the near future.

At the same time, the strong dollar also means that private assets have gained so much portfolio share that they have become overweight. While Kewpie Pension Fund – among Japanese corporate pension funds – has benefited from being one of the first to take an interest in alternative investments, Okimori says the impact of the recent depreciation of the Japanese yen is concerning. .

“Over the past 12 months, private assets have contributed positively to our performance, but this may not be the case for the coming year. I have to be careful with new investments due to the unpredictable exchange rate” , Okimori said.

See also: Japanese repos face exposure to illiquid assets

MINOR ADJUSTMENTS IN EQUITIES, FIXED INCOME

In addition to the depreciation of the yen against the US dollar, Japanese investors are also seeing their portfolios of developed market equities plunge as markets react to central bank interest rate hikes to counter inflation.

Kira of Russell Investments said some corporate pension funds may reduce equity exposure in developed markets, but he expects the change in equity allocation to be marginal.

As well as not wanting to add timing risk to their equity strategy, he said most have seen a surplus of equity investments and therefore can afford to maintain equity risk.

“Most corporate pension funds won’t change the allocation of equity and fixed income investments, and I think the trend toward private markets will continue,” Kita said, noting that , if so, they might start reconsidering their fixed income portfolios.

“In recent years, corporate pension funds have moved from benchmarks (such as the FTSE World Government Bond Index or Bloomberg Global Aggregate Index) to shorter duration assets or taken on credit risks in a very low yield environment. Once yields increase, they can revert to a longer duration,” Kita said.

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