Japan’s $90 Billion Innovation Fund Eyes Riskier Assets

Japan’s new 10 trillion yen ($90 billion) university fund is looking to invest in alternative assets and foreign stocks, its chief investment officer said, as it seeks returns that would trump those of the country’s more conservative pension funds.

Masakazu Kita wants the fund’s portfolio to include at least some alternative assets, such as private equity, real estate or infrastructure, and could also invest in hedge funds. The fund is set to hire widely among alternative asset specialists, Kita told Bloomberg News in an interview Wednesday.

Japan’s $90 Billion Innovation Fund Eyes Riskier Assets

“We’ll have at least 20, 30 people” in the front end overall, with more expansions possible depending on the fund’s future direction,” 52-year-old Kita said. “I expect there to be more alternative assets people than not.”

The university fund aims to start operations by the end of March. It needs quick returns to boost Japan’s faltering global standing in science and technology, and support the cutting-edge research capacities it still retains. As the country ages and its population shrinks, innovation will be a key for its longer-term economic growth prospects.

Japan has slipped to 10th place in the rankings of highly cited scientific papers during 2017-2019, according to a report by the National Institute of Science and Technology Policy on Tuesday. China topped the list with more than 10 times the number of cited papers out of Japan, the report showed.

Along with other initiatives such as a belated investment in semiconductors, the setting up of the fund is a recognition by the government that the country needs fast results to avoid falling further behind China.

To that end, Kita -- a former money manager at Norinchukin Bank -- has been tasked with achieving a 4.38% annual return. That will allow the fund to funnel 300 billion yen into high-end research every year. The target is higher than the average 3.7% returns of Japan’s mammoth Government Pension Investment Fund over the past two decades, underlying the need for the university fund to invest in comparatively higher-risk assets. Kita is undaunted.

“I don’t think the 4.38% target is overly ambitious,” he said. “With the right asset mix and balance, it should be achievable.”

Read more on Japan’s university fund

A recent government panel said that the fund should put 65% in stocks and 35% in bonds, conclusions that are likely to be followed. It’s a more ambitious approach than the GPIF, the world’s largest pension fund, which splits its allocation evenly between four categories of foreign and domestic equities and debt.

While the GPIF’s allocation is intensely scrutinized due to its size and impact on Japan’s growing number of pensioners, the university fund is likely to be less closely examined.

No ‘Home Bias’

Kita has two decades of experience managing money at Norinchukin, the main financial institution for agricultural cooperatives in Japan. At one point he was in charge of alternative assets for the bank’s investment portfolio, which now stands at 62 trillion yen. Past and present presidents of the GPIF have also come from Norinchukin, but the university fund is also likely to break with the pension fund strategy by focusing less on Japanese assets.

“There won’t be a home country bias,” Kita said, pointing to Japan’s roughly 10% makeup of global index funds in stocks or bonds. Kita didn’t indicate how much of its money it will invest domestically, and added that currency risks mean it could add more Japan assets.

And if the fund comes under pressure from politicians to sell when market conditions worsen, Kita said that in principle he’ll respond by rebalancing the portfolio.

“We do have to avoid taking undue risk, and getting to a place where we can’t recover,” said Kita. “But I don’t plan on being overly conservative, otherwise you can’t secure the returns.”

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