Japan's financial giants grab pension business with multi-asset funds

Fri Dec 28, 2012 12:31am EST

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By Chikafumi Hodo

TOKYO, Dec 28 (Reuters) - Nippon Life Insurance and other Japanese financial heavyweights are scoring new business with corporate pension funds - recently burned by an investment adviser scandal and difficult domestic markets - by tailoring multi-asset funds to offer limited risk and steady returns.

Japan's corporate pension funds, with more than 70 trillion yen ($826 billion) in assets, are increasingly targeting minimum returns - typically 2.5 percent a year - instead of using relative performance benchmarks that for years have come up short as bond yields fell and equities markets remained volatile, pension fund sources and asset managers say.

Pension funds are also tending to shun smaller, independent asset managers and hedge funds, after a scandal over $1.3 billion in hidden losses at Tokyo-based independent asset manager AIJ Investment Advisors earlier this year.

This puts Japanese life insurers, trust banks, and big domestic and foreign asset managers in position to battle for new pension business, and multi-asset funds are proving an effective weapon.

"Multi-asset funds are increasingly gaining popularity among many pension funds that want to control their risks, while at the same time raise stable returns," said Mitsuhiro Arakawa, an executive consultant at Russell Investments, a U.S.-based investment manager and pension fund consultant.

"We've seen this growing trend in multi-asset funds over the past few years, although the lineup is getting bigger this year and this trend is expected to continue," Arakawa said.

Multi-asset funds had been a typical part of Japanese pension funds' portfolios in the late 1990s and early 2000s, although declining returns encouraged them to take more direct control of their asset allocation decisions. Now the pendulum appears to be swinging back the other way.

"This new trend to buy multi-asset funds is just picking up. We need to see whether these funds actually perform well before more pension funds shift their money into that space," said a senior corporate pension fund manager, who declined to be identified.

RELIABLE RETURNS

Nippon Life, Japan's top life insurer, has a new multi-asset fund weighted heavily toward domestic debt, with about an 80 percent allocation, that aims for a 2.5 percent annual return.

The fund, managed by Nissay Asset Management and also including foreign sovereign bonds and domestic and foreign equities, aims to attract about 100 billion yen by the end of the year to next March and 300 billion yen within three years, said Masayoshi Tsuda, a Nissay Asset Management general manager.

The trust bank arm of Japan's top lender Mitsubishi UFJ Financial Group also aims for a 2.5 percent return from a balanced fund it launched in October, which has attracted 12 pension funds and 7.5 billion yen. It invests in conventional assets - domestic and foreign bonds and equities - as well as cash.

The trust bank unit of another big bank, Mizuho Financial Group, targets a more ambitious 4 percent return from a fund launched in September investing in conventional assets, emerging markets, and alternative assets, including gold and real estate investment trusts.

It has gathered about 15 billion yen so far from pension funds, said Kouji Shibata, senior portfolio manager at Mizuho Trust & Banking.

"Pension funds have been convinced, since these funds appear to offer realistic targets," said Akihiko Ohwa, a veteran pension fund manager who now lectures at the Graduate School of Finance, Accounting and Law at Tokyo's Waseda University.

Pension funds have been shunning risk since the 2008 Lehman crisis, shifting into fixed-income products from equities.

Returns became increasingly meagre, however, with the yield on the benchmark 10-year Japanese government bond holding near nine-year lows below 0.8 percent since the start of this quarter, although it has begun moving up on the prospects of aggressive policy measures to stimulate the economy.

Pension funds also remain wary of the domestic stock market, despite a 20 percent rally in Tokyo's benchmark Nikkei average since mid-November as optimism rises that the new government of Shinzo Abe, who has pressured the Bank of Japan for easier monetary policy, can finally break Japan from decades of grinding deflation.

Waseda University's Ohwa said Japan's pension funds remain keen to maintain or even lower the risk profiles of their portfolios as they focus on securing targeted returns, still smarting from the disappointing performance of Japanese equities for much of the past two decades. ($1 = 84.7950 Japanese yen) (Editing by Edmund Klamann)

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