Japanese pension funds' allocation to alternatives at record high

Allocation to alternative investments, such as real estate, by Japanese pension funds is at a record high, with many intending to increase their holdings further, a survey has revealed.

The survey by JP Morgan Asset Management (JPMAM), which polled 120 Japanese pension funds, found that the average Japanese pension fund now allocates 17.1% of its portfolio to alternative investments.

That allocation had climbed over the last five years, up from just 11.4% in 2013, the survey said.

And the majority (59.2%) of pension funds intend to further increase their allocation to alternatives next year.

Akira Kunikyo, an investment specialist at JPMAM, said: “Alternatives have truly become a mainstream asset class for return-constrained Japanese pension fund investors.”

He said the objectives for using alternatives along with expected risk and return levels vary widely, but most investors view alternatives as a source of stable cash flows with low correlation to public markets.

A growing number of pensions are also allocating to less liquid asset classes, suggesting that they are comfortable capitalising on the illiquidity premium.

The most popular types of alternatives were income-oriented assets - including real estate equity and debt, private infrastructure equity and debt, private credit and private placement real estate investment trusts.

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