Thursday, October 4, 2012

Japan's GPIF Diversifying Into Alternatives?

Asad Naeem of Business Recorder reports, Japan's giant pension fund eyes property, private equity:
The head of Japan's Government Pension Investment Fund (GPIF), the world's biggest public pension fund, said it may venture into alternative assets, such as infrastructure and private equity funds, as an ageing population puts more stress on the pension system.

Looking around for new and better investment returns is vital for the fund as for the past three years it has been paying out more in benefits than it receives in contributions to the national pension system.

GPIF Chairman Takahiro Mitani told Reuters in April that he was concerned that fewer people were paying into public pension plans at a time when more people were retiring from work.

Japan's population is expected to fall by 30 percent to below 90 million by 2060, when the proportion of those aged 65 or older will have almost doubled from 2010, a government agency survey showed in January.

"We are considering expanding our investment targets to alternatives, which include infrastructure, real estate and private equity," Mitani said in an interview on Thursday.

"The GPIF eventually will have to diversify its investment targets to alternative investments. I don't know if that's going to happen when I'm in this post but there's a question whether we should stick to these four asset classes forever," he said.

The fund, which has assets of 108.2 trillion yen ($1.38 trillion) - worth more than the Australian economy, the world's 13th largest - invests in four conventional asset classes, allocating funds in line with its model portfolio. This gives a weighting of 11 percent to Japanese stocks and 67 percent to domestic bonds, with 9 percent to foreign stocks and 8 percent to foreign bonds. It also has 5 percent invested in short-term assets.

Mitani said the GPIF, which began investing in emerging markets this year, was selecting advisers for its future alternative investment strategies aimed at diversifying and generating more returns for the long-term.
Performance is a big reason behind the decision to diversify into real estate, infrastructure and private equity. Nenkin Joho of Investments & Pensions Asia reports, GPIF posts negative returns in April-June quarter:
Japan’s Government Pension Investment Fund saw an investment yield, or modified total returns, of -1.85% in the first quarter of the fiscal year to March 2013 - the first negative performance in three quarters.

Its revenues were down ¥2,069bn ($25.8bn) from the end of March and reserves came to ¥108,168.5bn, a drop of ¥5,442.7bn from end-March. The main reason for the poor showing was the falloff in domestic and foreign equity returns because of the Eurozone debt crisis and global economic slowdown.

In terms of the time-weighted return of various asset classes, or market performance, the only positive result was domestic bonds at 1.04%. Yields on other assets were all negative, the worst being domestic stocks (-9.83%), followed by foreign stocks (-7.55%) and foreign bonds (-3.46%). Fiscal Loan Fund Special Account (zaito) JGBs, a subset of domestic bonds, produced a yield of 0.35%.

In monetary terms, domestic bonds generated a gain of ¥604.1bn. Domestic stocks lost ¥1,394.4bn, the only one of the four asset classes to suffer a drop of over ¥1trn. Revenues from foreign stocks were down ¥983.3bn and foreign bonds down ¥343.3bn. Zaito JGB earnings rose ¥47.3bn.

The drop in reserves was ¥3,373.7bn more than the decline in investment returns. This presumably includes assets that were cashed in to pay pension benefits. However, the GPIF has not divulged details, fearing the information could have a potentially significant short-term impact on the markets.

GPIF is also shaking things up in its massive bond portfolio. Earlier this week, Reuters reported that the giant fund selected 15 managers to invest JGBs:
Japan's public pension fund, the world's biggest, has selected 15 external money managers to oversee Japanese bond investments in its portfolio, the public fund said on Monday, in a move aimed at boosting returns to cope with a rapidly ageing population.

The Government Pension Investment Fund, known as the GPIF, has $1.39 trillion in assets, bigger than the size of the Australian economy. It invests the reserves of national and corporate pension plans.

The GPIF has already started to diversify its investments in search of better returns. For the first time ever, it committed money to emerging markets equities earlier this year.

It held about 70.2 trillion in Japanese government bonds, or about 65 percent of its 108.2 trillion yen portfolio as of June.

Out of the total in domestic bonds, 57.5 trillion yen are managed by asset managers and the GPIF. The rest is held under the Fiscal Investment and Loan Program (FILP).

The GPIF itself managed about 15 percent of domestic bond investments as of end-March.

The public fund selected a total of six managers to passively manage Japanese bonds, while it appointed nine managers for active investments in the asset class. It had issued a public tender last year to select the new managers of domestic bonds.

Mitsubishi UFJ Trust and Banking, State Street Global Advisors, part of State Street Corp, and Resona Bank were appointed as new managers for the GPIF's passive investment portion.

BlackRock Inc, the world's biggest money manager, which oversaw about 5.7 trillion yen ($73.26 billion) in passive domestic bond investments for GPIF as of end-March, was not part of that list. BlackRock continues to manage other investments for GPIF.

A total of four new managers, including Pimco and Prudential Investment Management, were selected as active managers of Japanese bonds. Previous managers in that asset class whose names were missing from the GPIF list were Nikko Asset Management, Nomura Asset Management, Meiji Yasuda Asset Management and Resona Bank.

BlackRock, Nomura Asset, Nikko Asset and Resona, which won a mandate for passive investment, declined to comment, saying they don't comment on client activities. Meiji Yasuda Asset was not immediately available for comment.

The GPIF suffered a $26 billion decline in its portfolio value in April-June, its first fall in three quarters, as the yen's strength and falls in domestic and foreign equities hurt its quarterly performance.

The public fund's investment in Japanese bonds produced a positive return of 1.04 percent, or a 604.1 billion yen investment gain.

The pension fund makes allocations in line with its model portfolio, which gives a weighting of 11 percent to domestic stocks, 67 percent to domestic bonds, 9 percent to foreign stocks, 8 percent to foreign bonds and 5 percent to short-term assets.

The public fund last selected active managers in the 2004/05 financial year, while this was the first time the fund selected new passive managers through a tender, a GPIF official said.

Following is the list of managers (new companies indicated by asterisk*):

1) Passive investment (benchmark: Nomura BPI excluding ABS)
*State Street Global Advisors
Mizuho Trust and Banking
Sumitomo Mitsui Trust Bank

2) Passive investment (benchmark: Nomura BPI JGB)
*Resona Bank
Sumitomo Mitsui Trust Bank
*Mitsubishi UFJ Trust and Banking

3) Active investment (benchmark: Nomura BPI excluding ABS)
*MU Investments
Diam Asset Management
Tokio Marine Asset Management
*Pimco Japan
*Prudential Investment Management Japan
*Manulife Asset Management
Mizuho Trust and Banking
Sumitomo Mitsui Trust Bank
Mitsubishi UFJ Trust and Banking
As I wrote earlier this summer, Japan's giant pension fund is trying to solve its funding problems, and is now considering diversifying into alternatives. China, which is sliding into its pensions black hole, should take note. Both countries desperately need to diversify their pension holdings but they first need to address critical governance issues.

Below, Paul Chapman of Reuters reports on how Japanese police made arrests over an alleged fraud involving more than 1.3 billion dollars of pension funds. Hopefully GPIF will never witness such scandals.