Japan’s defined-benefit (DB) pension funds are rebalancing their portfolios to raise exposure to alternatives and reduce the weighting of domestic bonds in the current negative interest rate environment, according to a survey by JP Morgan Asset Management (JPMAM).

The domestic bond holdings of Japanese DB pension funds fell to an eight-year low of 27.9% in the 2016 fiscal year ended March 31, 2017, from 29.8% in the previous year, JPMAM says in a July 19 statement on the survey findings.

Meanwhile, their weighting to alternatives increased to 16.5%, the highest since the survey was launched in 2008, from 15.6% in fiscal 2015.

JPMAM surveyed 121 Japanese DB pension funds and two Japanese mutual aid pension funds with AUM ranging from 50 billion yen (US$445 million) to over 300 billion yen between March and June.

Japanese pension funds reduced their positions in domestic bonds “probably backed by the BOJ’s [Bank of Japan] negative interest rate policy and an outlook that the lower interest rate will be prolonged”, JPMAM says.

The survey found that the pension fund portfolios were dominated by four traditional asset classes – domestic bonds, domestic equities, foreign bonds, and foreign equities.

This composition is “losing ground’ because of a high correlation between domestic and foreign equities through foreign exchange rates, alternative diversification and the negative interest rate policy, according to JPMAM.

About 80% of respondents say that the investment environment has changed due to the interest rate policy, and that the current environment is challenging in terms of securing returns.

Full Content: Asia Asset

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