JPMorgan: Japanese Pensions To Increase Alternatives Exposure

TOKYO (Reuters) – Japanese pension funds plan to increase their investments in alternative assets while reducing domestic equities in their portfolios, to diversify after the subprime shock, JP Morgan Asset Management said on Wednesday.

Pension funds also plan to increase allocations of domestic bonds to hedge against the risk of falling share prices, a survey by the Japanese asset management arm of third-biggest U.S. bank JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) showed.

“Pension funds are more concerned about the risk of a drop in share prices rather than the risk of a rise in interest rates,” Hidenori Suzuki, a vice president of JP Morgan Asset Management Japan, told reporters in a briefing on the survey.

“Pension funds are now at a turning point and they are looking to diversify especially as the market environment has changed after the subprime problems,” Suzuki said.

The survey showed that 69.7 percent of the 72 respondents indicated that they will cut equity allocations mainly in domestic shares, while 51.5 percent were planning to shift into alternative assets such as hedge funds and private equity.

Nearly half of the respondents held assets of more than 100 billion yen ($1 billion).

The survey was conducted between June and early October.

Pension funds’ allocation plans for foreign equities were nearly balanced, with 33.3 percent of the respondents saying they will cut their allocations, while 27.3 percent said they will increase them.

The survey showed Japanese pension funds’ investments in alternative assets were concentrated in absolute return products, such as funds of funds. The participation rate in absolute return products was 79 percent in Japan, sharply higher than 59 percent in the United States and 42 percent in Europe.

Private equity and real estate related instruments have not been commonly accepted in Japan, while they are more common in the United States and Europe, the survey showed.

Cash-rich Japanese pensions, however, are showing interest in allocating into alternative asset instruments linked to real estate, private equity, infrastructure and commodities, the survey showed. ($1=99.83 yen) (Reporting by Chikafumi Hodo; Editing by Chris Gallagher)