Japanese funds diversify away from equities and bonds

Toyota Motor’s $6bn pension fund has appointed Chuo Mitsui Asset Trust and Banking to invest in infrastructure projects for the first time. TMPF has reduced its ratio of traditional stock investment by 2%. It plans to invest around ¥10bn ($1.2bn) gradually in various infrastructure funds. Such investment is risky in view of its low liquidity, but has little correlation with traditional asset management, which TMPF feels would provide secure a certain level of returns from a long-term perspective. This might prove a springboard for TMPF to widen its involvement in long-term alternative investments in the future.

The Toyota fund has around 70,000 subscribers and manages nearly ¥500bn. It overhauled its policy asset mix this fiscal year for the first time in five years. It lowered its ratio of traditional listed stock investments from 51% to 49% and will now put 2% of its funds into infrastructure. The anticipated rate of return under TMPF’s system is 3.0%, and its target asset management yield is 3.3%. For its infrastructure investment, it will use a number of funds investing in existing facilities in the US and Europe, aiming ultimately for annualised yields of 6-7%. The actual investment target by the funds will be stocks in firms owning infrastructure, but some funds might turn partly to debt to diversify their own risk.

TMPF set up a new dedicated account in Chuo Mitsui Asset Trust’s pension trust account in December. It has entrusted the bank with due diligence and evaluation of individual funds and overall fund management. Funds selected by the bank for the dedicated account will be individually approved by TMPF.

When a pension fund with a large asset base uses multiple funds in an attempt to diversify risk, the task of keeping track of its investments, gauging its income gains and otherwise managing its money is tedious and complicated. By leaving the task entirely in Chuo Mitsui Asset Trust’s hands, TMPF feels that it can manage its funds more efficiently and more easily grasp the full picture of its investments. The bank will also handle forex hedging on the infrastructure investment portion.

Chuo Mitsui Asset Trust has provided external infrastructure funds to a number of firms since 2008. This marks the first time that it has handled all a firm’s investment in multiple funds in line with the client’s needs. The infrastructure investment will be TMPF’s first alternative investment based on a long-term perspective, a direction determined by the Asset Management Advisory Committee comprising members from the Fund and the company’s financial department.

In addition to infrastructure, it looked at the possibility of privately placed real estate funds, private equity, commodities, REITs and insurance commodities. In order to enhance its diversification of risk, it may move into such fields in the future or increase its allotment to infrastructure investment.

Meanwhile, the Osaka Hospital Pension Fund has begun an investment program using a number of new managers including hedge funds and emerging market government bonds. It hopes to replace active equity and bond investments, which have performed poorly, in order to establish a framework that can generate profits even when the market environment changes drastically. The shift in managers is designed to diversify OHPF’s investment approach, ensuring more stable returns.

It has adopted two new advisers for hedge fund investment. One investment program will combine equity long-short strategies from Ocean Asset Management, Indra Investments and Horizon Asset International. All are Japanese hedge funds unearthed by Daiwa Fund Consulting. The other is a global macro strategy operated by UK firm Brevan Howard Asset Management. OHPF will invest ¥500m via BFC Asset Management.

In traditional assets, OHPF has added new strategies for foreign bonds and domestic stocks. For the former, it will employ an active fund operated by PIMCO that invests in foreign bonds in 37 nations worldwide (including emerging economies) allotted on the basis of GDP. It has invested ¥2bn via Mitsubishi UFJ Trust. This will expand its bond investment into emerging nations.

For domestic stocks, it will turn to Asuka Asset Management via Daiwa Fund. The focus will be domestic small caps. It will use a value-up strategy that will work to establish good relations with the management of firms into which it is investing in hopes of raising corporate value. Total investment will be ¥500m.

At the same time, it is dissolving its ¥2bn foreign bond and ¥500m domestic bond funds with Mitsubishi UFJ Trust, ¥500m bond fund with Resona Bank, and ¥500m active domestic stock fund with MU Investments. OHPF Managing Director Hironori Fujioka notes simply that these funds were performing poorly.

In an overhaul of its policy asset mix in FY09, OHPF divided its pension assets into maintenance assets and profit-seeking assets, and switched its focus to investments incorporating one or the other of these types. It broadened alternative investments to 30% of total assets and has gradually expanded its investment product line. It plans to start infrastructure investment as well this month. 

As it widens the scope of its alternative investments, OHPF is preparing new asset management guidelines that will set caps on the ratio of alternative investments and cash entrusted per firm. It sees a need to set concrete rules in advance in light of huge losses in recent years by Kyushu Petroleum Industry Employees’ Pension Fund and others, who had concentrated their resources heavily with certain advisers. Fujioka indicates that OHPF will cap investment with any single adviser at 10% of overall assets and capping leverage used by privately placed real estate funds at five times.