J.P. Morgan Asset Management Japan Corporate Pension Funds ... · Asset allocation: Portfolio...

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FOR PRESS USE ONLY | NOT FOR PUBLIC DISTRIBUTION STRICTLY PRIVATE/CONFIDENTIAL Press Material J.P. Morgan Asset Management Japan Corporate Pension Funds Survey Report 2016 Japan Corporate Pension Funds Seek Sophistication in Lower Return Environment JPMorgan Asset Management (Japan) Limited

Transcript of J.P. Morgan Asset Management Japan Corporate Pension Funds ... · Asset allocation: Portfolio...

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J.P. Morgan Asset Management

Japan Corporate Pension Funds Survey Report 2016

Japan Corporate Pension Funds Seek Sophistication in Lower Return Environment

JPMorgan Asset Management (Japan) Limited

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General Description

Purpose

Respondents

Survey Timing

Methodology

This survey was conducted to evaluate how investment management is evolving at Japanese corporate pensions

123, mainly defined benefit pension funds

This includes 121 defined benefit pension funds, 2 mutual aid pension funds

March 2017 to June 2017

Interview

Others

In this survey report, information about fiscal year 2017 may include estimation, even if it is stated as “actual”.

Unless otherwise stated, information source is JP Morgan Asset Management Japan.

This is an excerpt of our survey translated to English. The full-length report is in Japanese.

FY2016 is Japanese fiscal year starting from April 1, 2016 to March 31, 2017. Same applies to other fiscal years.

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Respondents

(JPY) Defined Benefit Others Total

Au

M

More than 300bn 5 1 6

More than 100bn-

Less than 300bn 33 1 34

More than 50bn –

Less than 100bn 30 30

Less than 50bn 49 49

Not disclosed 4 4

Total 121 2 123

4.9% 27.6% 24.4% 39.8% 3.3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

資産規模別

More 100 bn

Less 300bn More 50bn

Less 100bn Less 50bn Not-Disclosed More

300bn

By AuM

(JPY)

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Key Findings

Measures to cope with “low return environment” continue

The fund management environment around Defined Benefit (DB) corporate pension funds continues to be challenging on the back of the introduction of a negative interest rate policy and yield curve control, a sharp increase in market volatility, rising hedge costs in the US and so on.

Asset allocation: Portfolio management under four traditional asset classes loses substance. Nature of portfolios gradually moves toward “economic-neutral” type

In asset allocation, domestic bonds fell to 27.9%, the lowest since the start of the survey in FY2008, probably on the back of the BOJ’s negative interest rate policy and an outlook that the low-interest rate environment will be prolonged. Alternative assets rose to 16.5%, the highest since the start of the survey.

Portfolio management under the four traditional asset classes (domestic bonds, domestic equities, foreign bonds and foreign equities), which was dominant in DB corporate pension funds, is losing ground. Factors behind this are considered to be a high correlation between domestic and foreign equities through foreign exchange rates, diversification in financial instruments led by alternative assets, the introduction of the negative interest rate policy, a higher correlation between equities and bonds in the so-called “market led by monetary stimulus,” and spread of bond substitute instruments.

Looking at portfolios, many assets and strategies have a relatively low sensitivity to economic fluctuations and account for certain sizes. While traditional equities and bonds are seen as “sensitive to economic fluctuation,” the assets and strategies supported in recent years are “neutral towards economic fluctuation.”

Separate strategies: Measures to cope with the negative interest rate policy and the rise in hedge costs made progress. In alternative assets, strategy changes advanced, focusing on income gains and lower correlations

About 80% of DB corporate pension funds answered, “The asset management environment has changed (will change) since the introduction of the negative interest rate policy,” and many said the current environment was challenging in terms of securing returns. Many took countermeasures using individual instruments, not by changing overall policy asset mix(AM).

In FY2016, measures to cope with the rise in hedge costs in the US made progress. Many used Euro-denominated assets and bond futures and adopted currency overlays.

Adoption of alternative assets continues. Though some DB corporate pensions are concerned by high valuations, many are looking to reduce risks and for stable income gains.

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Asset Allocation

Portfolio Management under four traditional asset classes loses traction. Portfolios are gradually moving

towards “economic-neutral” stance.

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Press Material Change in asset allocation: Domestic bonds may continue to be below 30% as Alternatives remain sole winner

Note: For pension funds setting up a “global category” with no breakdown into domestic and foreign categories for the asset c lass setup, “Global equities” are classified as “Foreign equities” and “Global bonds” into “Foreign bonds” for the purpose of data consistency. Figures may not add up to 100% due to rounding.

In FY2016, the recent trend of “falls in domestic bonds and overall equities, with a rise in alternatives” is confirmed.

Specifically, domestic bonds fell to 27.9%, the lowest since the launch of the survey in FY2008, probably backed by the BOJ’s

negative interest rate policy and an outlook that the lower interest rate environment will be prolonged. Meanwhile, alternatives rose to

16.5%, the highest level since the start of the survey.

1.2%

1.5%

1.3%

1.0%

0.9%

13.6%

11.7%

11.8%

11.7%

13.2%

27.9%

29.8%

30.3%

34.1%

35.4%

6.2%

6.6%

4.6%

5.4%

4.7%

13.0%

12.0%

14.6%

11.3%

10.2%

16.5%

15.6%

12.8%

11.4%

9.1%

7.9%

8.3%

9.1%

10.4%

11.1%

13.7%

14.5%

15.5%

14.7%

15.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2017年3月末

回答数:95

2016年3月末

回答数:75

2015年3月末

回答数:90

2014年3月末

回答数:93

2013年3月末

回答数:88

政策

AM

Foreign bonds, hedged Domestic bonds General a/c Cash Domestic equities Foreign bonds Foreign equities Alternatives

3.4%

3.1%

16.2%

13.6%

21.8%

26.4%

10.0%

8.8%

9.8%

10.0%

16.6%

15.0%

8.7%

8.9%

13.6%

14.2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2017年3月末

回答数:76

2016年3月末

回答数:70

実績

Asset Allocation (Policy AM)

Asset Allocation (Actual)

Foreign bonds, hedged Domestic bonds General a/c Cash Domestic equities Foreign bonds Foreign equities Alternatives

FY2012

FY2013

FY2014

FY2015

FY2016

FY2015

FY2016

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Asset allocation by size of assets: Fall in domestic bonds may continue

Note: As pension funds not disclosing their asset sizes are not included in this table, the numbers of respondents may not match those in other pages. Figures may not add

up to 100% due to rounding. The expected return is a simple average.

The ratio of domestic bonds fell below 20% in DB corporate pensions with JPY 200 billion or more. In the past surveys, large DB

corporate pensions determine trends of asset allocation and adoption of new instruments. Based on these, the fall in domestic bonds

may continue.

The ratio of alternatives is high in a broad range of DB corporate pensions irrespective of the asset size, probably due to the relaxed

regulation around the minimum investment amount. This indicates the spread of alternative investments.

1.6%

1.1%

0.5%

0.5%

14.8%

12.7%

11.7%

12.9%

27.3%

36.3%

26.1%

19.2%

4.9%

5.5%

10.9%

7.2%

11.4%

11.3%

12.7%

20.6%

18.9%

9.5%

18.4%

17.6%

7.9%

10.3%

5.0%

6.8%

13.1%

13.2%

14.7%

15.1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

500億未満

500-1,000億

1,000-2,000億

2,000億以上 2.01%

2.46%

2.32%

2.56%

Target

Return

Asset allocation by size of assets (Policy AM)

Foreign bonds (hedged) Domestic bonds General a/c

Cash Domestic equities

Foreign bonds Foreign equities Alternatives

More than ¥200bn

Less than ¥200bn

Less than ¥100bn

Less than ¥50bn

(JPY)

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Efficient allocation to safe assets and risk assets in line with target return

In the past, the higher the target return, the higher the allocation to alternatives. This year, however, ratios of assets allocated to

alternatives are at similar levels for most target return levels due to the spread of alternative investments and diversification of

alternative strategies.

However, assets and strategies within alternatives differ significantly among DB corporate pension funds. (See page 9 and later).

Source: (right) J.P. Morgan Asset Management “Long-Term Capital Market Assumptions 2017”

Note : (left) Figures may not add up to 100% due to rounding. (right) The outlook over the next 10-15 years.

0.4%

1.1%

1.0%

2.6%

26.8%

14.8%

11.0%

10.4%

25.0%

30.8%

27.4%

26.6%

41.0%

8.3%

6.2%

5.9%

4.5%

15.8%

9.6%

12.1%

15.5%

11.3%

6.0%

14.8%

14.7%

16.2%

21.8%

6.8%

5.0%

7.9%

8.6%

7.8%

11.0%

10.2%

12.5%

14.4%

15.1%

19.5%

0% 25% 50% 75% 100%

2%未満

回答数:13

2%以上~2.5%未満

回答数:20

2.5%以上~3%未満

回答数:44

3%以上~3.5%未満

回答数:16

3.5%以上

回答数:2

政策

AM

General a/c Foreign equities

Domestic bonds

Cash

Foreign bonds

Alternatives Foreign bonds (hedged)

Domestic equities

More than 3.5%

Less than 3.5%

Less than 3%

Less than 2.5%

Less than 2%

As of end-September 2016 ※As Alternatives are assets for which degrees of manager skills differ significantly, a certain latitude should be given for both expected return and assumed risk

Asset allocation by target return: Ratio of Alternatives flattening

Asset allocation by target return(Policy AM) Expected return/assumed risk for each asset

by J.P. Morgan Asset Management

Exp.

Return Risk Efficiency

Domestic bonds 0.25% 2.00% 0.13

Domestic equities 4.75% 19.25% 0.25

DM Hedged bonds 0.75% 3.50% 0.21

Global Aggs 1.50% 8.25% 0.18

DM Equities 5.50% 19.75% 0.28

US real estate 4.50% 14.75% 0.31

Global infra. 5.25% 14.75% 0.36

Private equities 7.00% 24.50% 0.29

Fund of HF 2.50% 14.50% 0.17

US REIT 5.00% 19.00% 0.26

US High Yield 4.75% 13.75% 0.35

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Change in asset allocation: Alternatives come next to domestic bonds

Note: Figures may not add up to 100% due to rounding,

We classify DB corporate pensions into those that 1) have invested in Alternatives and 2) have not.

In DB corporate pensions that have invested in alternatives, the ratio of alternatives is close to 20%, ranked next to domestic bonds. Alternatives, which have started as “the fifth asset class,” become a more major asset class than the four traditional assets.

However, strategies within alternatives differ significantly among DB corporate pensions, and so do expected returns and assumed risk. Some are employing methods to fractionalize management categories according to characteristics of each strategy for alternatives (see pages 15).

1.2%

1.7%

0.9%

0.6%

13.7%

10.2%

13.1%

20.5%

25.4%

29.1%

40.7%

33.6%

19.8%

18.3%

7.2%

7.5%

1.5%

1.6%

12.1%

11.6%

17.6%

14.6%

7.3%

7.8%

11.0%

11.7%

13.3%

13.9%

15.3%

17.4%

0% 25% 50% 75% 100%

2016年3月末

2015年3月末

2016年3月末

2015年3月末

オルタナあり

オルタナなし

Foreign bonds (hedged)

Domestic bonds General a/c Cash Domestic equities Foreign bonds Foreign equities

Alternatives Foreign bonds Domestic equities

Foreign bonds (hedged)

Domestic bonds General a/c Cash Foreign bonds

No

t h

avin

g A

lter

nat

ives

H

avin

g A

lter

nat

ives

FY 2015

FY2016

Asset Allocation (Policy AM)

FY 2015

FY2016

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3.9%

5.1%

2.5%

2.0%

1.6%

1.6%

0.7%

0.8%

2.1%

1.5%

2.0%

1.5%

1.0%

0.7%

0.9%

0.5%

0.8%

0.5%

1.0%

0.9%

0% 5% 10% 15% 20%

2017年3月末

2016年3月末

実績

Absolute

Return

(FoF type)

Multi

Asset

Real Estate

REIT PE

Infra Insurance

Equities Long-Short

Private Debt

Absolute Return

(Equity & bond type)

FY2015

FY2016

Details of Alternatives: Prudent stance seen in separate strategies

※The definition of each category is as follows. The categories

above are simplified ones to grasp tendencies:

Low Correlation: absolute return, multi-asset, insurance and

equities long-short

High Income: REIT, real estate, infrastructures and PD

Others: private equities

10.9%

11.0%

4.7%

3.2%

1.0%

0.9%

0% 5% 10% 15% 20% 25%

2017年3月末

2016年3月末

High

Income Others

Low

Correlation

FY2015

FY2016 Total

16.6%

Total

15.0%

Total 16.6%

Total 15.0%

Note: (left and right) Including estimates by J.P. Morgan Asset Management (The answers of “Alternatives in general” are reallocated to allocation by individual alternatives

asset). Accumulated figures may not be equal to the total shown in the chart due to rounding.

Details of alternatives show a significant allocation to an Absolute Return type (FoF type) due partly to past experiences. Though this type represents assets which are expected to show low correlations with the four traditional assets, it tends to decrease in recent years due to heightened correlations and sluggish performance. On the other hand, insurance tends to increase.

At the same time, more are allocating their resources to private REITs, real estate and infrastructure assets due to the concept of “income investment” and low volatility. As a new income strategy, an increasing number of respondents have considered adopting private debt, which is apparently supported due to short investment periods.

On an average, DB corporate pensions hold 3.8 of the 10 strategies below. showing that different alternative strategies are being mixed together. For the number of strategies and their combinations, please see pages 19-20.

Asset allocation to Alternatives (Actual) Asset allocation by Alternatives category

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Alternatives by target return: Various strategies

8.1%

6.4%

6.0%

7.5%

2.8%

0.5%

1.9%

1.6%

1.4%

0.6%

0.4%

1.8%

1.9%

3.2%

2.4%

1.0%

0.9%

0.4%

1.1%

1.4%

1.8%

2.0%

2.3%

1.9%

0.4%

1.6%

0.9%

0.4%

1.4%

1.2%

0% 5% 10% 15% 20% 25%

2%未満

回答数:8

2%以上~2.5%未満

回答数:17

2.5%以上~3%未満

回答数:37

予定利率 3%以上

回答数:14

Absolute Return Multi

Asset Real

Estate

REIT

Infra

Multi

Asset Insurance

Insurance

REIT Insurance

Absolute Return

REIT Insurance Multi

Asset

More than 3%

Less than 3%

Less than 2.5%

Less than 2%

Eq LS

Total

19.1%

Total

16.6%

Total

14.9%

Total

15.8%

Private Debt

PE

Note: DB corporate pensions that have invested in Alternatives are covered. Labels for asset classes with a small allocation ratio may be omitted. Accumulated figures may

not be equal to the total shown in the chart due to rounding.

As a general tendency, weights of REITs, real estate, infrastructures and PE increase as their target returns rise.

Multi-asset and insurance strategies are adopted to a certain extent regardless of target return levels. For multi-asset instruments,

different funds are seen seeking different return levels. For insurance, a low correlation with traditional assets is expected and the

restraint on investment amounts may affect the allocation weight.

Asset allocation to Alternatives by target return (Actual)

Real

Estate

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2.84%

2.78%

2.73%

2.55% 2.56% 2.51%

2.40%

2.20%

2.40%

2.60%

2.80%

3.00%

'11 '12 '13 '14 '15 '16 '17

Outlook for asset allocation: Will cuts to target return be resumed?

2.71%

5.23%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

'09 '10 '11 '12 '13 '14 '15 '16 '17

Expected return

Assumed risk

The target return, which had remained above 2.5% since FY2014, fell slightly in the this year’s survey. Funds that lowered their target

return levels accounted for 9% of the total, and some of them used high-level surplus as the resource.

While the low interest rate environment is expected to be protracted due to the BOJ’s yield curve control policy, target return levels

may enter a moderate downtrend again. In fact, 9% of respondents will consider lowering their target returns.

Target return Expected return and assumed risk

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Outlook for asset allocation: Market environment seen by DB pensions

Note (left): Of the moves in the financial market, there were no questions on “rises in equities etc. on Trump’s policies,” “protectionism on Trump’s policies” and “Brexit and

instability in European…” in FY2015.Source : (right): J.P. Morgan Asset Management “Long-Term Capital Market Assumptions 2017”

75%

53% 47%

29%

18% 13%

10% 8%

70%

79%

43%

32%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2016年度末 2015年度末 FY2016 FY2015

BOJ’s

negative

rate policy,

prolonged

low interest

rates

Rapid

rise in

volatility

Pace of US rate rises,

rise in currency hedge costs

Yen’s

apprecia

tion risk

Rises in equities

and rates on Trump’s

policies

Rise in protectioni

sm on Trump’s policies

Brexit and instability

in European

politics

Hard landing of

China, debts in

emerging economies

Moves in the financial market seen “as key issues in asset management” (incl. multiple answers)

DB corporate pensions are most conscious of domestic bonds due to the negative interest rate policy and yield curve control. The lower return environment is expected to continue as low growth of the global economy, including Japan, is anticipated.

Due to relatively high levels of investments in foreign bonds, interest in “the pace of interest rate rises in the US and a rise in currency hedge costs” remains high - in line with last year.

Looking at responses on President Trump’s policies, DB corporate pensions are not focused on “rises in equities and interest rates related to Trump’s policies” and “protectionism” as they are unable to make a clear decision due to uncertainties.

Respondents who are most conscious of “a rapid rise in volatility” account for 53%, down from last year.

0%

2%

4%

6%

8%

10%

12%

14%

16%

'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24 '26

Return from portfolio with a 6:4 ratio of equities and bonds (Estimate by J.P.Morgan Asset Management, 10-year rolling, annual rates)

Actual

return Estimate

Recession

As of September 2016

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0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015 2016

Reduce risk levels

in portfolio

Reduce

ratio of

domestic

equities

Ratios of DB corporate pensions that answered following as “future measures”

Prices rise when economy expands

Prices rise when economy expands

High risk Low risk

DM

Bonds yen-

hedged

Equities

Invest

ment-

grade

bonds

Mortgages

High-yield

bonds

Minimum

variance Real estate

and infrastructure

equity

(FY)

Multi

Asset

Unconstrained bonds

Since 2008, DB corporate pensions have looked to reduce risk, mainly in domestic equities. However, in the past five years, the number of pension funds that chose future measures aimed at “reducing risk levels in portfolios” and “lowering the weight of domestic equities” has continued to decrease. After several years, risk control measures from the standpoint of volatility, have paused.

Contributing to measures aimed at lower volatility have been low-liquidity assets and strategies such as minimum variance. The portfolios show a tendency that pensions adopt assets and strategies with relative ow sensitivity to economic fluctuations and they do not focus on assets yielding big returns when the economy expands or recedes (such as equities and bonds). If traditional equities and bonds are seen as a “economic-sensitive” type to economic fluctuation, the assets and strategies supported in recent years are an “economic-neutral” type.

Mapping image of assets and strategies

Insurance

*Items in double orange lines

are assets and strategies

supported in recent years.

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Outlook for asset allocation: Portfolio Management of 4 traditional assets lose ground

Classification of Policy AM

25%

31%

23%

39%

33%

23% 20%

15%

9%

13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Ratios of DB corporate pensions

that reviewed/will review Policy AM (by fiscal year)

Going Forward 11%

3%

13%

6%

6%

17%

44%

グローバル株債枠を両方採用

グローバル債券枠のみを採用

グローバル株式枠のみを採用

安定資産・収益追求枠

その他の新枠組み

国内債券枠の中にヘッジ外債

/一般勘定を組み入れ

伝統4資産(+オルタナ)

Adopt both global equity-bond framework Adopt only global bond framework Adopt only global equity framework Stable asset-seeking income framework Other new framework

Portfolio management under the four traditional asset classes (domestic bonds, domestic equities, foreign bonds and foreign equities), which was dominant in DB corporate pension funds, is losing ground.

Factors behind this are considered to be a high correlation between domestic and foreign equities through foreign exchange rates, diversification in financial instruments led by alternative assets (the adoption of economic-neutral instruments), the introduction of the negative interest rate policy, a higher correlation between equities and bonds in the so-called “market led by monetary stimulus, ” and spread of substitute instruments. Particularly in FY2016, the introduction of the negative interest rate policy made DB pensions reconsider investments in domestic bonds, leading to setting “frameworks of global bonds/equities-bonds.”

DB corporate pensions that review their policy AM account for 10-30% a year. Moreover, portfolio management under the four traditional assets may lose further ground in future.

Management using other assets

than the 4 traditional ones: 39%

Management under the 4 traditional assets: 61%

Include hedged foreign bonds/general a/c in domestic bond framework 4 traditional assets (+alternatives)

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Outlook for asset allocation: continuation or revolution

Equities Bonds Low Corr Income

High Liquid

Mid Liquid

Low Liquid

Eg 6:Liquidity x Asset Classes

High risk

Mid risk

Low risk

Eg 7:Risk level only

Domestic

Bonds

Domestic

Equities

Foreign

Bonds

Foreign

Equities

Alternativ

es

20% 20% 20% 20% 10

Example 1:4 traditional assets + Alts x Liquidity

10% High

Liquidity

10% Low

Liquidity

Global Bonds Global Equities Alternatives

40% 40% 20%

Eg 2: Global Equities and Bonds

Base asset Growth asset

60% 40%

Eg 3: Base asset and Growth asset

For

Liability

Rates Credit Equities Inflation Diversifi

cation

20% 20% 20% 20% 10% 10%

Bonds Equities Inflation

Hedge

Portfolio

Hedge

25% 25% 25% 25%

Eg 4:Asset Classes + Factors/Characteristics

Eg 5:Risk-centered

Appendix:Canada Pension Plan Investment Board

19%

37% 23%

16%

6%

15%

85%

カナダ国債

グローバル株式

未公開株式(DM,EM,CA)

上場株式(DM,EM,CA)

不動産・インフラ

国債および絶対収益型

クレジット投資 Exterior:Reference Portfolio

Interior:Actual Portfolio

Canada Gov. bonds

Global equities

Private eq. (DM, EM, CA)

Public eq. (DM, EM, CA)

Real estates, Infra

Gov.bonds/Abs strategies

Credit

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Outlook for asset allocation: mapping of new portfolio management

4 Traditional

assets

4 assets

+ Alts

Global EQ/FI

Alts

Base asset

+

Growth

asset

# of asset classes

Risk Level

(e.g. 7)

4 traditional

assets x

Liquidity

(e.g. 6)

4 traditional

assets +

Alts x Liquid

(e.g. 1)

Global EQ/FI

+Inflation +

Port. hedge

(e.g. 4)

1 2 3 4 5

# of factors/ framework

0

2

1

3 Risk

centered

(e.g. 5)

0

Below shows a map of new portfolio management, setting # of asset classes in x axis and # of factors/framework in y axis.

This shows two movements of new portfolio management. i). simplify asset classes, ii). set new factors other than # of asset classes.

i

ii

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Press Material Outlook for asset allocation: “Accelerated shift away from JGBs” and “strategy changes in Alternatives”

Domestic bonds General a/c Domestic equities Foreign bonds Foreign bonds

(currency hedged) Foreign equities Alternatives

-20.2%

-8.0%

-22.2%

-3.8%

-9.3%

-13.9%

-2.4%

-17.3%

-1.8%

-10.0%

-0.9%

-3.6%

-9.1% -8.2%

-18.8%

-8.5% -5.1% -5.1%

-12.0% -12.0%

-20.5%

-0.9%

-6.0%

-2.6% -1.7%

-6.0%

-9.4%

-25%

-20%

-15%

-10%

-5%

15.6% 14.7%

3.7%

13.3% 18.5%

7.4%

44.6%

3.6% 3.6% 6.4% 9.1% 1.8%

40.0%

3.4% 1.7% 4.3% 2.6% 6.8% 5.1%

49.6%

2.6% 0.9% 8.5% 5.1% 1.7%

65.0%

20%

40%

60%

80%2014年 2015年 2016年 2017年

More

allo

catio

n/

new

in

vestm

ent

Less a

llocatio

n

While the four traditional assets are viewed as overpriced, a shift from traditional assets to alternatives advances. Specifically, reflecting reductions in domestic bonds after the introduction of the negative interest rate policy, the ratio of respondents who answered that they “will reduce domestic bonds“ increased from last year.

For the other traditional assets, both the “increasing” and “decreasing” trends take a pause.

In alternatives, “strategy changes in alternative assets” are confirmed as a trend while some strategies show a more poor performance.

% of pension funds that will increase or decrease allocation to each asset class

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Outlook for Alternatives (1): Rival camps continue to vie for supremacy

Multi asset

Insurance

Equities long-short

REIT

Real estate (Equity, debt)

Private debt

PE

0.9%

6.8%

0.9%

4.3%

9.4%

4.3%

3.4%

9.4%

6.0%

1.7%

0.9%

6.0%

Most alternative assets are expected to gain weight. Specifically, many respondents are considering to raise the weights of infrastructure investments, real estate and private debt. Although these asset classes are relatively less liquid, they are nevertheless expected to demonstrate stable performance with low correlation.

Among assets with low correlations, many respondents are considering to raise the weight of insurance due to favorable performance and a low correlation with traditional assets. Meanwhile, many are expecting to reduce the weight of absolute return assets (including the FoF type).

% of pension funds that will increase or decrease allocation to each asset class

More allocation/ new investment Less allocation

Assets with

low

correlations

Income-

oriented

assets

Absolute return (FoF, equities-bond type)

Infrastructure (Equity, debt)

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Evolution of Alternatives (1): current state

# of Alternative strategies

1~2

# of Alternative strategies

3~4

# of Alternative strategies 5~

Average No. of Alternative strategies: 1.4 Ratio of Alternatives per strategy: 6.4%

Combination example: FoF+REIT/Insurance

Average No. of Alternative strategies: 3.6

Ratios of Alternatives per strategy: 4.6% Combination example:

REIT +Insurance/Multi asset/FoF/

+Infra/PE/Real estate

Average No. of Alternative strategies: 6.7

Ratios of Alternatives per strategy: 5.5%

Combination example:

Equal weights on 6-7 of following Absolute return/REIT/Multi asset/

Insurance/Infra/Equities long-short/Real estate/PE/PD

Alternatives: 8.8%

Alternatives: 16.4%

Alternatives: 36.5%

To grasp how alternatives will evolve, we classified the ratios of alternatives in portfolios by (1) the number of alternative strategies and (2) the ratios of alternatives in separate portfolios.

In samples of “one or two strategies and ratios of less than 10%” (left below), the main strategy is the FoF type and the secondary strategy is REIT/insurance.

In examples of “five or more strategies and ratios of 20% or more” (right above), there are no main and secondary strategies, with six or seven strategies given equal weights.

-10%

10-20%

20%- Ratios of Alternatives in portfolios (on actual basis)

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1

1 保険

REIT

Evolution of Alternatives (2): future direction

No. of Alternative strategies

1~2

No. of Alternative strategies

3~4 No. of Alternative strategies

5~

-10%

10-20%

20%-

Alternatives:

8.8%

Alternatives:

16.4%

Alternatives:

36.5%

With respect to questions on future direction, a group of “up to four alternative strategies and 20% of alternative assets” (two on left) plan investments in REITs and insurance, looking to raise the ratio of alternatives by increasing the weight in their main strategies.

However, a group of “five or more alternative strategies and more than 20% of alternative assets” plan to increase investments or make new investments mainly in hard assets.

All in all, the number of alternative strategies is around seven at most. Pensions are likely to increase or make new investments while conscious of diversification within their alternative strategies.

※複数回答含む

2

2

1 不動産

保険

REIT

Future direction

Future direction 1

1

2

2

1

2

2

マルチアセット

PE

不動産

インフラ

保険

REIT票数: 増額

票数: 新規投資

New investment

Increase investment

*Including multiple answers

Future direction

Insurance

Real estate

Insurance

Insurance

Infra

Real estate

Multi asset

Ratios of Alternatives in portfolios (on actual basis)

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By Asset Class and Strategy

Shift away from traditional benchmarks

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20

22

2

12

14

2

5

-24

-6

-9

-3

-7

-5

-7

2

3

2

4

-7

-3

-2

-6

-40 -30 -20 -10 0 10 20 30

その他(39)

マイナス金利対応型(2)

一般勘定(169)

パッシブ(134)

内外債スイッチ型(24)

ヘッジ付外国債券(58)

事業債運用(24)

長期債運用(19)

短期債運用(8)

Nomura-BPI総合アクティブ(101)

新規採用(2016年度)

解約(2016年度)

新規採用(2015年度)

解約(2015年度)

New(FY16)

Terminated(FY16)

New(FY15)

Terminated(FY15)

Domestic bonds: Accelerated shifts away from domestic bonds

Past 2 years: Changes in the number of Domestic bond mandates

1

1

1

3

2

-7

-1

-1

-5

-15 -10 -5 0 5 10 15

その他(39)

マイナス金利対応型(2)

一般勘定(169)

パッシブ(134)

内外債スイッチ型(24)

ヘッジ付外国債券(58)

事業債運用(24)

長期債運用(19)

短期債運用(8)

Nomura-BPI総合アクティブ(101)

採用(今後)

解約(今後)

New

Terminated

Active

Short dur.

Long dur.

Credit

Hedged foreign bonds

Country switch type

Passive

General a/c

Negative yield exclusive

Others

Outlook: Changes in the number of Domestic bond mandates

Note: Data showing the number of change is small are omitted. Figures following strategy names represent the number of mandates at the beginning of FY2015.

Shifts away from domestic bonds have accelerated due to the negative interest rate policy and yield curve control. Terminations continue to surpass new allocations, mainly in passive funds.

In the framework of domestic bonds, investments flow to “funds to cope with negative interest rates,” “hedged foreign bonds,” and “others (subordinated bonds and others).”

Active

Short dur.

Long dur.

Credit

Hedged foreign bonds

Country switch type

Passive

General a/c

Negative yield exclusive

Others

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About 80% of DB corporate pensions have answered, “The investment environment has changed due to the negative interest rate policy,” commenting that management has become more difficult.

As countermeasures, more pensions have adopted several products, rather than change their policy AM. Particularly among separate instruments, many are adopting “products to cope with negative interest rates (a negative yield exclusive type)”.

Some pensions have scrapped the domestic bonds framework and established a new “global bonds framework.”

Domestic bonds and negative interest rates: Measures to cope with negative yields advance in a year

Improved to some extent

9%

Improved 1%

To some extent 41%

Not much

11%

None 6%

Plan to change

6%

Considering 5%

Not much

23% No change

66%

Q1. Has your investment environment changed due to the introduction of negative interest rates?

Q2. Do you change your policy AM due to introduction of negative interest rates?

Q3. Did your management environment improve after the yield curve control policy in September last year?

Commissions newly imposed on short-term assets Debts swell due to low interest rates

Triggers shifts away from domestic bonds Expected return of domestic bonds falls Leads to scrapping domestic bond framework

No change

66%

Note: Figures may not add up to 100% due to rounding.

Significantly 42%

Changed

22%

Adopt several products ・Negative yield exclusive type

・Hedged foreign bonds

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Press Material Foreign bonds: Signs of a tapering in expansion of hedged foreign bonds

2

4

10

11

2

1

2

11

6

-8

-4

-3

-8

-3

8

2

9

2

3

2

4

1

2

-3

-6

-2

-15 -10 -5 0 5 10 15 20 25

その他(25)

パッシブ(国債型運用)(93)

債券バランス型(含絶対収益)(34)

スマート・ベータ(1)

モーゲージ債券/米地方債(4)

ハイ・イールド債券/バンクローン(20)

投資適格型(9)

エマージング債券(33)

地域特化(4)

ヘッジ付外国債券(72)

総合型運用(63)

国債型運用(39)

新規採用(2016年度)

解約(2016年度)

新規採用(2015年度)

解約(2015年度)

Gov. bonds

Aggregate bonds

Hedged foreign bonds

Region specific

Emerging bonds

Investment grade

High yield/Bank loan

Mortgages/US municipal bonds

Smart beta

Fixed income absolute return

Passive

Others

New(FY16)

Terminated(FY16)

New(FY15)

Terminated(FY15)

Past 2 years: Changes in the number of Foreign bond mandates

3

2

1

2

-4

-1

-1

-4

-5 -3 -1 1 3 5

パッシブ(国債型運用)(93)

債券バランス型(含絶対収益)(34)

ハイ・イールド債券/バンクローン(20)

エマージング債券(33)

ヘッジ付外国債券(72)

国債型運用(39)

新規(今後)

解約(今後)

Gov. bonds

Hedged foreign bonds

Emerging bonds

High yield/Bank loan

Fixed income absolute return

Passive

New

Terminated

53%

76%

81% 82% 88%

85% 79%

28% 30%

36% 44%

49% 48%

59%

20%

40%

60%

80%

100%

'11 '12 '13 '14 '15 '16 '17

Hedge ratio: Foreign bonds

Hedge ratio: All non-JPY assets

Currency Hedge Ratio

Note: Data showing the number of change is small are omitted. Figures following strategy names represent the number of mandates at the beginning of FY2015.

Main moves: (1) “JGBs ⇒ Hedged foreign bonds, mortgaged bonds and others, a balanced fixed income approach,” (2) “Hedged foreign bonds ⇒ Mortgaged bonds and others, a balanced fixed income approach”

Currency hedge ratios, which were on the rise in the last few years, have turned down on rising currency hedge costs against the dollar. The hedge ratio of overall foreign currency assets has risen as alternative assets (with currency hedges) have been included in portfolios.

Outlook: Changes in the number of Foreign bond mandates

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Press Material Foreign bonds hedge costs: Countermeasures are Euro-denominated products, bond futures and currency overlays

Q1. Do you have an awareness of the problems concerning

rises in hedge costs (vs. USD)?

Q2. Have you taken any measures to rising hedge costs (vs. USD)?

Q3. What is the level of assumed hedge costs going forward?

To some extent 41%

Not much

7%

No 6%

Changed/plan to change 33%

No change 41%

Undecided

2%

Considering 24%

1.25-1.50% 38%

Higher than 1.50%

50%

Expect further rises

Recognize that costs remain high

Cancel hedged US Treasuries. Consider European bank loans Studying measures to reduce hedge costs

Have cost consciousness. But have no intention to take currency risks

Considered measures but found no effective one

Note: Figures may not add up to 100% due to rounding.

Of the respondents, 88% answered that they were aware of the issues concerning hedge costs (against the dollar), up from 67% last year.

In FY2016, many adopted measures to counter issues in hedge costs against the dollar. Particularly, there were shifts to Euro-denominated assets, the use of bond futures and the adoption of currency overlays. Some skipped taking currency risks while being conscious of costs.

Yes, greatly 47%

Adopt Euro-based assets Reduce hedge costs using bond futures Adopt currency overlay Introduction of unconstrained bonds made easy by

setting global bond framework

1.25% or less, annually 13%

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Stand-out points in separate strategies: Multi-asset

Note: The total of ratios of answers may not add up to 100% as multiple answers are included.

33%

65%

42%

0% 0% 0%

20%

40%

60%

80%

33%

52%

0%

11%

4%

0%

20%

40%

60%

Others

2%

32%

37%

22%

15%

0%

10%

20%

30%

40%

50%

83%

4% 8%

0% 0%

20%

40%

60%

80%

100%

5%

24%

62%

0% 0%

10%

20%

30%

40%

50%

60%

70%

Q1. What did (do) you expect for investments? Q2. What did (do) you focus on in investments?

Q3. Do actual investments fulfill your expectations?

Q4. What is your complaint, or what is your concern over new investments?

Q5. What are your plans for future investments?

Low correlation

with traditional assets

Flexible changes

in allocation

Substitute for bonds

or low volatility

For reference

in allocation

Others Levels of

expected

risk/return

Effect of

diversified

investments

Grade of confidence in/reproduci

bility of strategy

Comprehensibility of

investment targets and

methods

Content Almost

content

Neither content

nor discontent

Discontent

a bit

Discontent Fail to achieve

assumed return

Higher correlation

with traditional

assets

Explanation of

management

methods

Difficult to compare with BM

and other companies

Others Rise in existing

investment strategies

Rise in different

strategies

No

change Reduction Others

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Stand-out points in separate strategies: Unconstrained bonds

Note: The total of ratios of answers may not add up to 100% as multiple answers are included.

41%

32%

23%

61%

2%

0%

10%

20%

30%

40%

50%

60%

70%

5%

24%

0%

52%

19%

0%

10%

20%

30%

40%

50%

60%

7%

82%

9% 5% 2%

0%

20%

40%

60%

80%

100%

51%

42%

2% 5% 0%

0%

10%

20%

30%

40%

50%

60%

70%

5%

21%

74%

0% 0% 0%

20%

40%

60%

80%

Q1. What did (do) you expect for investments? Q2. What were you careful about in investments?

Q3. What level of return do you expect? Q4. What level of risk can you accept? Q5. What are your plans for future investments?

Effect of

diversified

investments

Stable

income

gains

Restraint

of down

side

Preparation

for interest

rate rise

Others Ratio of

emerging

nations

Ratio of

investments

in high-yield

bonds

Whether

there is

currency

risk and

its size

Liquidity Level of

leverage

1-3% 3-5% 5%

or

more

According to content

of products

Others According to content

of products

Others Below

5%

5-8% Over

8%

Start

invest

ment

Raise

amount

Keep

invest

ment

Reduce

amount End

invest

ment

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Stand-out points in separate strategies: Direct lending and mezzanine

Note: The total of ratios of answers may not add up to 100% as multiple answers are included.

42%

96%

21% 13%

4%

0%

20%

40%

60%

80%

100%42% 42%

29% 29% 29% 25%

4%

0%

10%

20%

30%

40%

50%

28% 28%

44%

0% 6%

0%

10%

20%

30%

40%

50%

60%

38%

29%

0%

33%

0%

10%

20%

30%

40%

50%

60%

70%

25%

17%

33% 33%

8%

0%

10%

20%

30%

40%

Q1. What did (do) you expect for investments?

Q2. What did (do) you focus on in investments?

Q3. Do actual investments fulfill your expectations?

Q4. What do you plan for future investments?

Q5. What is your concern over the assets?

Effect of

diversified

investments

Stable

income

gains

Low

volatility High

total

return

Others Level of

expected

risk/return

Manager’s ability to

seek promising

targets

Manager’s ability to cope with

default

Yield

level

Level of

leverage

Fund’s

duration

Fund’s structure incl. tax effect

Content Almost

content

Neither content

nor discontent

Discontent

a bit Discontent Increase Maintain Decrease Undecided None Liquidity Fall in

return due to

intensified competition

Increase

in

default

Others

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Stand-out points in separate strategies: Real estate and infrastructure

Note: The total of ratios of answers may not add up to 100% as multiple answers are included.

56%

93%

6% 6% 0%

0%

20%

40%

60%

80%

100%

0%

62%

15% 15%

0% 0% 8%

0%

10%

20%

30%

40%

50%

60%

70%

42% 47%

16%

0% 0% 0%

10%

20%

30%

40%

50%

60%

43%

28%

0%

28%

0%

10%

20%

30%

40%

50%

60%

70%

24%

17%

5%

45%

10%

0%

10%

20%

30%

40%

50%

Q1. What did (do) you expect for investments? Q2. What did (do) you focus on in investments?

Q3. Do actual investments fulfill your expectations?

Q4. What is your plan for future investments? Q5. What is your concern over the assets?

Effect of

diversified

investments

Stable

income

gains

Capital

gains

Inflation

hedge

Others Level of

expected

risk/return

Income

level

Either a core or an opportunistic strategy

Either an open-end or closed-

end

Manager’s

performance

Fund’s structure incl. tax effect

Others

Content Almost

content

Neither content

nor discontent

Discontent

a bit

Discontent Increase Maintain Decrease Undecided None Liquidity Effect of

interest

rate rise

Fall in return due

to intensified

competition

Others

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This material is prepared by JPMorgan Asset Management (Japan) Limited. This material has been compiled from external sources we believe to be reliable but

we do not hold ourselves responsible for its completeness or accuracy. Our views and analysis based on the results of the survey constitute our judgment and

are subject to change without notice. This material does not intend to recommend buying or selling any securities and the purpose of this is the explanation even if

it refers any securities and/or issuers in this material. There is a possibility that J.P. Morgan Asset Management, any of its subsidiaries or its employees hold any

securities mentioned in this material.

JPMorgan Asset Management (Japan) Limited

Financial Instruments Business – Registration Numbers: Kanto Local Finance Bureau (Financial Instruments Firm)No. 330

A member of “The Investment Trusts Association, Japan”, “Japan Investment Advisers Association”, “Japan Securities Dealers Association” and “Type II Financial

Instruments Firms Association”

This material was issued by JPMorgan Asset Management (Japan) Limited only for press/media, not for public distribution.