Japan $87 Billion Innovation Fund Ramps Up Alternative Focus

(Bloomberg) -- Japan’s 10 trillion yen ($87 billion) innovation fund designed to support cutting edge research is boosting its focus on alternative investments as it nears its launch.

“I can’t say a specific number,” said chief investment officer Masakazu Kita in an interview Wednesday. “But alternative assets should be of a certain amount, it should have a sizable weighting.”

While Kita is still helping put together the investment team, former HarbourVest Partners managing director Tadasu Matsuo has already been hired to serve as gatekeeper for the fund’s alternative assets, an indication of the priority Kita places on diversifying investments from the get-go.

Set to start by the end of March, the new fund will seek annual returns of 4.38% to pay out 300 billion yen each year for high-level research across Japan. The idea is to shore up the country’s declining position in frontier research, and help it innovate. 

The fund has a basic reference point of investing 65% in stocks and 35% in bonds, but within that framework Kita says a diverse range of assets will ensure higher returns. An expansion of specialization in environmental, social and governance investment will come later, he added. 

In addition to his experience at the global private equity firm, Matsuo previously served as head of alternative investments at Japan Post Insurance.

In as soon as a year, Kita hopes Matsuo’s alternative investment team will also include specialists investing directly in private equity, venture capital, real estate, infrastructure and, down the line, even hedge funds. 

Still, Kita said that it’ll likely take years for the portfolio to reach maturity, particularly with lower liquidity assets.

Analysts are forecasting that the 10 trillion yen fund has potential to push up domestic stocks, as the Bank of Japan slows its exchange-traded funds purchases. 

Nomura Securities’ Yunosuke Ikeda estimated that the university fund could potentially boost the benchmark Topix index by 4% to 6%, extrapolating from the fund’s reference portfolio and some of Japan’s massive pension fund’s allocation methods. 

“It’s possible that the boost effect could be double that in the next fiscal year,” Ikeda said.

A New University Fund Could Give a 6% Jolt to Japan’s Topix

Beyond Matsuo, Kita said the fund had also hired Masakazu Ikeda, former senior investment manager at Sompo Japan Insurance. Ikeda will be overseeing the fund’s broader strategy and asset allocation.  

Once the alternative investments settle, the fund also plans on expanding its expertise in ESG, Kita said. 

“In terms of hiring specialists, that’ll be the second wave,” said Kita. “As the correlation between social and economic returns increase, we’ll have to choose our sectors better.” 

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