The Pension Fund of Japanese Corporations, an institutional investor that manages retirement schemes on behalf of small- and medium-sized enterprises, is tweaking its asset allocations to capitalise on an expected recession.

Speaking at Private Debt Investor’s Seoul Forum on Monday, chief investment officer Yoshi Kiguchi said the ¥23 billion ($163 million; €147 million) institution had budgeted this year to raise its allocations to distressed debt to 10 percent, from 2 percent currently. It also has a 2 percent allocation to special situations, though it is unclear if this will be included in the allocation increase.

“We believe this year we are preparing for recession, especially in the US and the Europe, and we have already budgeted to increase distressed allocation to a maximum of 10 percent,” Kiguchi said.

“We have prepared such a budget right now because we have experience: in early 2009, we increased distressed exposure and we got an annual return of more than 20 percent. From this kind of experience, we believe we may have a chance to increase [exposure] later this year.”

PFJC has a 90 percent allocation to alternative investments, Kiguchi said, noting that this figure was unusually high compared with its peers.

“Generally speaking, Japanese investors are too conservative to invest in such kind of areas,” he added. “Our pension fund is very different.”

Though PFJC does not publicly disclose its individual asset allocations, according to a 2020 article authored by Kiguchi, its portfolio includes long-short Chinese equities, consumer loans, foreign trade financing, real estate funds and long-shorts in US and European financial corporations.

Special situations are emerging as a key fund focus in the 2023 mid-market, as managers respond to growing signs of distress driven by macroeconomic conditions, PDI reported in April. According to PDI’s latest LP Perspectives survey, 29 percent of LPs plan to deploy more capital into distressed debt and special situations this year, compared with just 14 percent a year prior.

Still, predicting widespread distressed activity continues to be a brave bet, PDI noted this month. The latest study from Kroll Bond Rating Agency concluded that for those who did not hedge themselves against interest rate rises have already suffered their fates and “the damage is mostly done”.

The study, published on 15 June, concluded that around 16 percent of the 2,000 US mid-market companies covered would be unable to meet interest payments from current cashflows if the reference rate rises to 5.5 percent. Just prior to the study, the Fed put rises on hold at 5-5.25 percent – close to, but not quite reaching, the level at which KBRA predicted further problems.