Japan Post Insurance, the Japanese postal giant’s insurance division, has set an ambitious roadmap for its push into global markets.
During a keynote interview at PERE’s annual real estate conference held in Tokyo this week, Tadasu Matsuo, head of alternative investments at Japan Post Insurance, told delegates about the investor’s plans to allocate 1.5 percent of its total portfolio to alternative investments over a three-year period, starting April this year.
This effectively means Japan Post Insurance is looking to deploy as much as $10 billion in real estate, private equity, infrastructure and hedge fund investments from its $700 billion in total assets under management.
With this push into alternatives investing, Japan Post Insurance has started on the path towards building a desired portfolio, but through a gradual and step-by-step approach.
“As a life insurance company, we have a long-term AUM traction, so we have a 13-14 years’ life of liability. We have some room to observe the liquidity risk for investments,” Matsuo said.
“In other words: We do not have to rush to accumulate the assets short-term. Rather than that, we diversify the vintage with a step-by-step approach. Maybe in 10 years’ time we will reach our optimal portfolio of alternative assets.”
Matsuo pointed to the lack of past experience of making alternative investments by Japan Post Insurance’s investment team and risk management team as the main reason for the life insurer’s step-by-step approach.
A “very conservative institution” like Japan Post Insurance will have to engage the foray into global alternative investments with such a strategy, he said.
Matsuo went on to explain that the expected geographic allocation is likely to be 40 percent to US, 40 percent to Europe, and 20 percent to Asia-Pacific. In Asia-Pacific, Australia is expected to be one key target market. Within these markets, the insurer will target core or core-plus investments through a multi-manager model to begin with.
Matsuo recognized the relatively high asset prices and challenges of finding core assets in gateway cities during the current stage of the cycle.
“For alternative investments, sacrificing a certain level of illiquid risk means that we also expect an illiquid premium to do that kind of investment. So natural consequences say 6-8-10 percent, but it depends on the risk-return profile,” Matsuo said, explaining the investment returns being targeted from alternative investments. “We don’t expect 12-15 [or] 20 percent [returns] for core open-ended real estate fund investments in the US or Europe as of today. We expect a reasonable range of risk-return profile for each of the asset classes.”
For the first leg of its step-by-step approach – to be implemented over the next couple of years – Japan Post Insurance will cooperate with third-party advisors and gatekeepers for alternative fund investments. Matsuo said he hopes that the second stage will start in two or three years life, wherein the insurer will take on direct alternative investments once it has accumulated sufficient investment expertise and expanded its internal capabilities.
Matsuo also addressed some of the other challenges lying ahead for the investor. He noted the most important criteria for getting through a market upset like the global financial crisis would be to maintain a steady hand and keep investing throughout the cycle.
“Currency hedging cost is another headache for us. But alternative investments require long-term perspectives as well as a certain level of illiquid risk,” he said. “We do not hedge real estate fund investments nor private equity nor infrastructure [investments] because we have not had a legacy portfolio of alternatives. To a certain point, we can absorb the currency risk to a certain degree.”