JAPAN - Japanese pension funds will decrease their home equity bias in light of weak home-country equity returns, a consultant predicted.
Towers Watson director of investment consulting in Tokyo Taro Ogai said: "Japanese equity is lagging behind other markets' performance which is raising doubts about Japanese pensions' home country bias in equity allocation."
In a recent report, Towers Watson tracked the performance of 120 Japanese pension funds as of the end of December. The report found these schemes currently invest 20% in domestic equity, four percentage points more than their international equity allocations. A decade earlier, the ratio was two to one, with pension funds allocating 40% to domestic equity and 20% to international shares.
By comparison, Japanese equities make up less than 10% of the global market.
Ogai said he expects the level of domestic equity to eventually match the exposure to overseas equities, and to potentially keep dropping. "Although, I do not think allocation to Japanese equities will become equal to the ratio of the market value," he added.
According to data by Towers Watson, the total investment return for the period starting April 2009, the start of the schemes' fiscal year, through December 2009 is estimated to be 11.5%. Third quarter returns, spanning October through December, is estimated to be 2.2%.
"Global equity's rebound since March and the recent Japanese yen depreciation helped push up the returns for Japanese pension funds," said Ogai.
The current average asset allocation invests 20% in domestic equities; international equities, 16%; domestic bonds, 43%; international bonds, 14%; alternatives, 4% and 3% earmarked for cash.
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HM Treasury has agreed in principle to give NEST a £329m contingent liability guarantee in the event of the master trust's wind up or closure.
AMP Capital has set up a dedicated team to help institutional investors, including pension funds, invest in infrastructure through direct equity allocations.