Japanese Pensions Plan More Alternative Investments After AIJ

Japanese pension funds plan to boost investments in alternative assets even after the fallout of AIJ Investment Advisors Co., which allegedly lost pension clients’ money, a survey by JPMorgan Chase & Co. showed.

Retirement funds that plan to increase investments in the asset class, which includes hedge funds and private-equity funds, in the current fiscal year that started April 1 totaled 20.6 percent, according to the survey by JPMorgan’s Tokyo-based asset management unit. That was the most among 10 asset types.

Japanese pensions’ struggle to meet expected returns in the world’s most rapidly aging society amid sluggish markets was highlighted after Tokyo-based AIJ allegedly lost more than $1 billion after offering hedge-fund strategies. Many pension plans are reviewing their investment processes, including governance and managers, following AIJ, the survey showed.

Fifty-three percent of respondents said they paid attention to the AIJ scandal and it will affect their investments. Some 67 percent said they are implementing some sort of preventive measures.

AIJ oversaw 145.8 billion yen ($1.8 billion) of clients’ money and lost 109.2 billion yen from derivatives trades directed over nine years, the country’s Securities and Exchange Surveillance Commission said last month.

Almost 25 percent of pensions lifted allocations to alternative assets in the last fiscal year.

Retiring Boomers

Japanese pensions, which have traditionally invested mainly in bonds, are seeking other assets to maintain steady returns and fund retiree benefits as the country faces a shrinking workforce, with 2012 marking the first year the nation’s baby boomers are set to retire.

Among other investments, 6.3 percent of pensions said they plan to increase investments in emerging-market bonds and 7.9 percent in emerging-market equities, the survey showed. By contrast, 26.2 percent of the respondents plan to reduce holdings of domestic equities and 19 percent of them in foreign equities.

The stock benchmark Nikkei 225 Stock Average is about a quarter of its 1989 peak, while the 10-year Japanese government bond yield is at around 0.9 percent, the second-lowest after Switzerland.

Pension plans have been hit by the strengthening yen, prompting them to take a “cautious” stance on their investment plans, and employing more currency hedges with their investments, according to the survey.

JPMorgan surveyed 126 Japanese pension funds in its preliminary report. It plans to release a full report in May.

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