GPIF’s $52bn loss could strengthen the case for alternatives

Japan's $1.3trn pension fund, which reported its weakest results since the 2008 financial crisis, could face fresh calls to raise its current holdings of alternative assets.

The Government Pension Investment Fund of Japan lost ¥5.3 trillion ($52 billion; €47 billion) in fiscal 2015, driven by disappointing returns from its holdings of domestic equities, which fell 10.8 percent.

GPIF, which manages some ¥134 trillion of reserve funds of the Employees' Pension Insurance and the National Pension, published its annual report on 29 July. Private equity fund managers and investors tend to watch GPIF’s performance closely because the pension fund has said that it plans to raise its holdings of alternative assets as it pursues a higher-growth strategy to boost returns.

Japanese stocks made up about 21.8 percent of GPIF's asset mix as at March 2016, a touch below 22 percent the year before. While GPIF's holdings of domestic equities tumbled, domestic bonds, which made up the lion's share of GPIF's total assets – about 37.5 percent, down from 39.4 percent the year before – posted a 4.1 percent yield.

GPIF also holds foreign stocks (about 22 percent) and foreign bonds (some 13.5 percent) as well as what it calls “short term assets” (5.1 percent), which includes cash deposits.

GPIF’s alternatives holdings, which include private equity, real estate, and infrastructure, are not separated out and reported as a stand-alone asset class in the fund’s annual report. Instead, alternative assets are counted within the fund’s main asset classes (domestic and foreign bonds, and domestic and foreign equities), based on their risk-return profiles, a GPIF portfolio manager told Private Equity International.

In recent years GPIF has come under pressure to improve its performance, and in 2014, following Prime Minister Shinzo Abe's call for a change in GPIF's approach to investing, the fund changed its allocation mix. GPIF more than doubled its investments in domestic and foreign equities, raising its allocation to 25 percent for each type of stock from 12 percent in 2013; it also reduced its exposure to domestic bonds to 35 percent from 60 percent. In addition, GPIF said that it would allocate up to 5 percent of its overall portfolio to alternatives.

GPIF has yet to reach that 5 percent allocation. As at the end of March 2016, the pension fund has invested about 0.06 percent in alternatives, with ¥1.9 billion in private equity, and ¥81.4 billion in infrastructure through co-investments with external institutional investors, the fund said in its report.

GPIF posted a negative return, minus 3.81 percent, for the year ending 31 March, compared with a return of 2.14 percent the year before. This is the first negative return that GPIF has reported in five years, and the weakest results since the turmoil of the 2008 financial crisis, when the fund was hit with a record loss of ¥9.3 trillion, or about 7.6 percent, for the year ended March 2009.

At a news conference on Friday, GPIF president Norihiro Takahashi said that he “humbly recognises” the loss GPIF reported in 2015, but he emphasised that the fund's investments should be viewed from a long-term perspective.

The pension fund conducts a periodic review of its asset mix, “stays vigilant to recent changes in the market”, and will continue to take appropriate actions, he said.

Early this year, GPIF appointed State Street Trust and Banking as one of its first custodians for its investments in alternative assets.

In November 2014, the pension fund hired private equity veteran Hiromichi Mizuno, a former partner at London-based private equity firm Coller Capital, as its first head of investments, and shortly after, started the search for in-house investment managers to take charge of the alternatives portfolio.

In the same year, the pension fund launched an infrastructure investment programme and announced a co-investment agreement with Canada's Ontario Municipal Employees Retirement System and the Development Bank of Japan to invest in infrastructure assets such as power generation, electricity transmission, gas pipelines, and railways in developed countries.

This post has been updated to include details about how GPIF reports its investments in alternatives.