DB Corporate Pensions puzzled by the negative interest rate policy Allocation to alternatives reaches record high

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1 Tokyo Building 2-7-3, Marunouchi, Chiyoda-ku Tokyo, , Japan This is a translation of the Japanese press release issued in Tokyo on 27 th June, Press Release J.P. Morgan Asset Management releases its 9 th Japanese Corporate Pension Fund Survey Report DB Corporate Pensions puzzled by the negative interest rate policy Allocation to alternatives reaches record high [Tokyo 27th June 2016] JPMorgan Asset Management (Japan) Ltd. today released the results of a survey conducted earlier this year to find out about changes in Japanese corporate pension funds' portfolios from fiscal year 2014 to 2015, as well as their future direction. The survey results highlight the continual trend of money shifting away from traditional assets and towards to alternatives. At the end of March 2016, the allocation to alternatives reached a record high of 14%. The introduction of a negative interest rate policy by the BoJ in January meant that holdings of domestic bonds in portfolios received a lot of attention, however, the survey result unveiled that the share of domestic bonds was almost unchanged from the yearago at 29.9%. In the results, 49% of DB corporate pension funds responded that they plan to change or are considering a change to investment policies due to the introduction of negative interest rates. It shows that many DB corporate pension funds are uncertain of how to approach negative interest rates or will take a wait-and-see stance. However, about 80% of DB corporate pensions responded, The management environment has changed due to the negative interest rate policy. The diminished attractiveness of domestic bonds means that DB corporate pension funds are considering a lower allocation to domestic bonds and higher allocation to alternatives in the future. At the end of March 2016, about 70% of DB corporate pension funds were utilising alternative assets in portfolios. Of those, alternatives had the second highest weighting in portfolios (18.8%) after domestic bonds (27.1%). Alternatives have become a main asset class relative to traditional holdings. However, strategies within alternatives differ significantly among DB corporate pensions. Alternatives are a significant allocation to absolute return strategies, being used as a source of stable return. At the same time, many pension funds are adopting the concept of income investment as stable asset management and allocating to REITs, real estate and infrastructure asset. Absolute return and multi-asset strategies are widely supported by DB corporate pensions regardless of target return levels. However, DB corporate pensions with target return of 4% or higher tend to have a notably higher allocation to real estate and PE. 1

2 While DB corporate pension funds perceive some alternative strategies to offer inferior performance, there is a possibility that strategy changes within alternatives will become a new trend. Another growing trend is that many DB corporate pension funds are considering increasing allocations to high income assets such as private debt, infrastructure investment, real assets and REITs. In the four traditional assets, the survey highlights a shift away from traditional benchmark strategies to benchmark agnostic strategies such as cash control and smart beta. This is an attempt to find sources of return other than beta when global growth is sluggish and the economic cycle is nearer the end. The key findings are outlined in the following pages: NB: The survey was conducted from early March to May For the findings announced in this press release, a total of 127 Japanese pension funds participated, including 116 defined-benefit corporate pension funds, 9 corporate employee pension funds and 2 other pension funds. Survey Results Key Points 1. Change in asset allocation: Alternative assets remain the sole winner The rising trend in alternatives assets continued in the latest survey. While the four traditional assets appeared increasingly overvalued, the trend toward alternatives continued due to a growing need for stable asset management and the diversification of revenue sources. The share of Domestic bonds was almost unchanged from the year-ago level, but DB corporate pensions are well aware of the issues concerning the introduction of the negative interest rate policy. Going forward, a drop in domestic bond exposure well below 30% may even be conceivable. Note: For pension funds setting up a global category with no breakdown into domestic and foreign categories for the asset class setup, Global equities are classified as Foreign equities and Global bonds into Foreign bonds for the purpose of data consistency. As of the end of March 2016, there were 14 DB pension funds (slightly less than 16% of the total) which answered that they are setting up global categories for both equities and bonds. Figures may not add up to 100% due to rounding. 2

3 2. Domestic bonds and negative interest rates: High awareness of issues, varied responses About 80% of DB corporate pensions have answered, The management environment has changed due to the negative interest rate policy. With respect to changes in investment policies, their responses differ, including whether they have changed policies or not and what countermeasures to adopt. Note: Figures may not add up to 100% due to rounding. 3. Asset allocation by target return: Efficient diversification confirmed Efficient allocation to safe assets and risk assets in line with target return Greater allocation to foreign bonds by those with target return of 3%-4%, due to estimated expected returns of % The higher the target return, the higher the allocation to alternatives. However, assets and strategies within alternatives differ significantly among DB corporate pension funds. Source: (right) J.P. Morgan Asset Management Long-term Capital Market Return Assumption 2016 Note: (left) Figures may not add up to 100% due to rounding. (right) The outlook over the next years. 3

4 4. Change in asset allocation: Alternatives as a substitute for domestic bonds The below breaks down DB corporate pensions into those investing in alternatives and those who do not. Among DB corporate pensions investing in alternatives, the allocation to alternatives is the second largest after domestic bonds, meaning alternatives have become a main asset class relative to traditional assets. DB corporate pensions that are not investing in alternatives have a larger allocation to general account assets. Strategies within alternatives differ significantly among DB corporate pensions, and so do expected return and assumed risk. Some are employing methods to fractionalize management categories according to characteristics of each strategy for alternatives. Note: All on a plan, policy asset mix basis. Figures may not add up to 100% due to rounding. 5. Outlook for asset allocation: in addition to shifts away from traditional assets, there may be more strategy changes within Alternatives While the four traditional asset classes are considered to be overvalued, the flows of funds from traditional assets to alternatives continued. In particular, the trend of reduced exposure to domestic bonds in response to negative interest rates, the flows of funds from domestic bonds to alternatives is likely to increase. However, while the target return is showing signs of stabilization, adjustments to traditional asset allocation other than domestic bonds appears well underway. Meanwhile, even with the perceived inferior performance of some alternative strategies, strategy changes within Alternatives could become a growing trend. 4

5 *** J.P. Morgan Asset Management J.P. Morgan Asset Management is part of JPMorgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.676 trillion in assets under management (as at 31 March 2016) and offices in more than 30 countries around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services firm with assets of $2.4 trillion (as at 31 March 2016) and operations in more than 60 countries. The Firm is a leader in investment banking, financial services for consumers, small-business and commercial banking, financial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at Media contact: Aki Toda, JPMorgan Asset Management (Japan) Ltd., aki.toda@jpmorgan.com This material is prepared by J.P. Morgan Asset Management (Japan) Ltd. to provide the information about the results of the Japan pension fund survey. Our views and analysis based on the results of the survey constitute our judgment and are subject to change without notice. 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. 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. It does not guarantee that all opinions and/or strategies indicated in this material are appropriate to all clients. This material is prepared to provide the reference information, so it does not intend to advice about finance, law and tax etc and does not include those advises about these topics. Please contact to specialist about the issues in finance, law and tax. J.P. Morgan Asset Management (Japan) Ltd. Financial Instruments Firm: Kanto Local Finance Bureau (Financial Instruments Firm)No. 330 A member of the Investment Trusts Association, Japan, the Japan Securities Investment Advisers Association and the Japan Securities Dealers Association, Type II Financial Instruments Firms Association 5