Rising sum

The world’s biggest pension – Japan’s Government Pension Investment Fund – may look to boost returns with a move into alternative investments.

Japan’s Government Pension Investment Fund has an aversion to risk. It has historically played it safe with its portfolio, about 70 percent of which comprises government bonds, according to the pension’s most recent financial report.

But sources tell PEI the world’s largest pension, whose assets total about ¥120 trillion ($1.3 trillion; €962 billion), is working with consultants as it considers a move into alternative investments to help diversify its portfolio and juice returns.

Japan's pensioners:
risk averse

A Japanese government minister in January called out the pension for its lackluster returns, according to a Reuters report. Internal Affairs Minister Kazuhiro Haraguchi urged a review of the fund’s performance after the institution lost $108 billion in the fiscal year that ended in March 2009. Haraguchi didn’t specify how the pension should restructure.

GPIF has been “studying alternatives”, confirms Kotaro Mori, director of the pension and welfare department at the Japan External Trade Organisation.

Mori stressed he doesn’t know how likely it is that GPIF will carve out room in its portfolio for alternative asset classes, however. “One of the issues is how to manage risk in alternative investments,” Mori says. “Another issue is the fees.” GPIF pays no performance fees right now, he says.

Another problem with the pension moving into alternatives is an aversion to risky strategies on the part of the Japanese people, especially after the country took heavy losses in the Asian financial crisis in the late 1990s.

Mori worked for the Ministry of Health in 2003, which helps run the GPIF. “The media harshly criticised us because we invested peoples’ pension money in the stock market and took big losses,” he says. “Of course, we soon recovered the loss but our peoples’ risk tolerance seems to be not so large.”

It’s hard to say if or how soon Japanese public pensions will move in a big way into private equity. “It will take time, but once there is a trigger, I think the movement will be quite sudden,” says one source. GPIF could be that trigger.