March 28, 2023 | Stamford, CT — Japanese institutions are embarking on an ambitious plan to remake their investment portfolios by significantly expanding allocations to alternative asset classes. This transformation is introducing a new level of complexity that will eventually strain the capabilities of many internal investment teams. 

Over the next three years, institutions plan to significantly expand allocations to real estate, private equity and debt, infrastructure, and other asset classes, while cutting allocations to many traditional asset classes—a trend that has been gaining steam for at least the past three years. 

Almost 45% of Japanese institutions and half of Japanese pension funds plan to hire at least one new asset manager in the next 12 months. The vast bulk of those hires will be in real estate and alternative asset classes. About 1 in 5 expect to make a hire in international infrastructure equity and nearly a quarter of institutions report plan to hire in direct private equity and/or private equity funds of funds. 

“Those short-term hiring plans reflect longer-term changes Japanese institutions are enacting in their portfolios,” says Seiji Ishii, Head of Japan for Coalition Greenwich and co-author of New Strategies Required for Increasingly Complex Institutional Portfolios in Japan. 

Hiring Boom in Alternatives Creates New Challenges for Institutions
Most Japanese pension funds, endowments and other asset owners do not have extensive expertise in asset classes like private equity or private credit. These investors will face new challenges such as building robust and diversified portfolios, conducting manager due diligence in unfamiliar and opaque asset classes, and managing cash flows.  

As they take on exposure to alternative asset classes, Japanese institutions should be supplementing investment consultant support with additional advice from asset managers.  

“Institutions facing these new challenges should work to bridge any gaps in experience and expertise by asking their asset managers to commit to relationships based on knowledge transfer and other forms of advisory support,” says Seiji Ishii.

New Strategies Required for Increasingly Complex Institutional Portfolios in Japan presents the full results of the annual Japanese Institutional Investors Study, including data and insights on asset allocations, expected changes to allocations, asset manager hiring and relationships, OCIO, and ESG.