Japan's GPIF rejigs allocation, talks mandates

The GPIF has about $1.3 trillion in assets under management. Tokihiko Shimizu, director-general of the research department, tells AsianInvestor the results of its asset allocation review, and talks more generally about the opportunities it sees in emerging markets and alternative and private investments.

Q You have done a review of your asset allocation. What was the result?
Tokihiko Shimizu: Yes, we have checked our asset allocation to see if it is appropriate or not. We have reduced our allocation to domestic bonds from 67% to 60%, increased in domestic stocks from 11% to 12%, raised international bonds from 8% to 11%, increased international stocks from 9% to 12% and maintained short-term assets (cash) at 5%. [Expected returns for domestic bonds are 3%, for domestic stocks 4.8%, global bonds 3.2%, global stocks 5% and short-term assets 1.9%.]

Q You have increased your allocation to global bonds by three percentage points. Will you now look to invest in Asian fixed income and emerging market debt?
Shimizu: We have not invested in emerging market bonds so far. But in my opinion it is a very attractive investment opportunity. You say currency appreciation is good and credit good, but if we go ahead to emerging bonds, the one issue in reserve is related to the index. The EM bond index is based on market cap, but I think market cap is not always good for us, that means having large exposure to large debt countries. GDP-based or other indices may be more suitable.

Q So you like alternative indices?
Shimizu: For example, a few weeks ago, the CIO at one of the big Scandinavian public pension funds came to Japan and met us and they think the same thing; investment in emerging bonds based on GDP or some other alternative index. Also NBIM, Norway’s pension fund, invests in emerging market bonds in that manner.

Q So what mandates are you looking to award now?
Shimizu: We are now in final selection stage in terms of foreign equity active management. And we are asking for a public auction in terms of Japanese domestic active equity investment.

Q What is the asset allocation model you use?
Shimizu: We have evaluated our asset allocation based on revised, up-to-date data. We were constructing our portfolio based on data from 1973 to 2008. We are now evaluating our existing portfolio asset allocation based on data from 1973 to 2012. We have simply updated and recalculated our efficient frontiers and checked where the existing asset allocation will point.

Q Have you used a consultant to help with asset allocation?
Shimizu: We hired Nomura Securities.

Q What investment expertise do you have at GPIF?
Shimizu: We handle about 30% of the investment by ourselves in-house, which is limited to domestic bonds only, and we entrust about 70% of total assets to outside asset management companies.

Q How big is the in-house team?
Shimizu: Seven people.

Q Do you intend to bring any other investment expertise in-house?
Shimizu: We have a restricted budget by the government with strict limitations. And also we are prohibited from investing in equities in-house by the law. We only do domestic right now.

Q What are your return requirements to match your liabilities?
Shimizu: We are a public pension fund and our mandate is consistent with the actuarial valuation made by Ministry of Health, Labour and Welfare. Four years ago the ministry made new valuations and they set a number of 1.6% over the long-term wage increase rate, which would be naturally considered as our investment mandate. It is an important question, because the ministry gives us no specific number as a mandate, but requires us to meet with safety and efficiency. We understand that safety means that the total risk of our asset allocation is similar to that of domestic bonds.

Q Is alternatives something that GPIF might consider?
Shimizu: I am responsible for such investment. At the end of this March we finalised our feasibility study regarding private investments and real assets, including private equity and infrastructure investment. We have some research on this and we are considering feasibility schemes on how to install such investment. Our purpose for including such investment tools needs to be clear. Firstly we are at a stage where we are facing negative cash flow because of Japan’s ageing society. Total benefits are more than the total amount of contributions, so we have to sell a substantial portion of our assets to give to the scheme. In general cash inflow from domestic bonds is nominal, it is not tracked to inflation. We would look at private assets to capture inflation-linked cash inflow. Secondly, one of our mandates is to create alpha over the index, but in an advanced country it is very difficult to do this in the listed equity world, because the stock market is very efficient. We have to consider expanding to private equity investment to create alpha over the index. The third reason is related to emerging listed equities. We launched our emerging market listed equities exposure last June, but at the same time we noticed this world is concentrated in specific sectors, financial and natural resources related companies, and far less in terms of service sectors. The purpose of expanding to emerging market listed equity is to capture the GDP growth in emerging countries, and we feel it is not good only to invest in these sectors. A private equity fund in emerging markets always focuses on the consumption sector, the services sector, which will capture GDP growth.

Q Will you do co-investment or fund of funds? What will be your approach?
Shimizu: In general, there are two ways to do this in my opinion, either fund of funds or co-investment. I do not say one is better than the other. We have to consider both options.

Q Who is advising you on your alternative investment approach?
Shimizu: We hired four research companies and they gave us a series of reports. We have not hired a consultant dedicated to private investment. We are now talking internally about our approach. But in my opinion, we now almost have the capability to set up such a new investment scheme.

Q When might you start to invest in private equity or infrastructure?
Shimizu: It is a secret. But as an example, we decided to invest in emerging market listed equities about four years ago. We then carried out public auctions and selected several managers and then investment committee deliberated on them. We only finalised our investment into emerging listed equity last June, so it took a very long time. But I think this kind of practice is not good for private investment. Having done the feasibility now, we would want to shorten that time.

Q Who did you select for emerging market equity?
Shimizu: The department of investment management selected them. They are Invesco Asset Management Japan (subadvised by Invesco Advisers); Nomura Asset Management; Nomura Funds Research and Technologies (Dimensional Fund Advisors); Mizuho Asset Management (Wells Capital Management); Sumitomo Mitsui Asset Management (Vontobel Asset Management); Sumitomo Mitsui Trust Bank (Baring Asset Management); and Lazard Japan Asset Management (Lazard Asset Management).

Q Would you consider Japanese private equity?
Shimizu: It is a controversial issue. Some professionals at global fund of funds said the few big private equity funds in Japan have made mistakes in the past, so their performance has not been good. On the other hand, it is important to learn from the past mistakes. I can’t say any more about that.