GPIF mulling $41b investment into alternatives

Japan's Government Pension Investment Fund (GPIF) is considering increasing its allocation to alternatives from a paltry 0.2% of assets under management to about 3% over the next three years, according to a senior member of the pension fund’s investment team.

As the world’s largest pension operator, that extra 2.8% could see another ¥4.64 trillion – $41 billion at current exchange rates  – flowing into the asset class, based upon GPIF's end-September AUM of ¥165.61 trillion ($1.47 trillion).

And when you're that big, understatement is almost assured. 

“We are interested in raising our alternatives investments, in a small way over the coming years,” the official told AsianInvestor.

The official did not specify which areas of alternatives the pension fund would seek to invest into, beyond noting that real estate, private equity and infrastructure were all asset areas of interest.

GPIF, which was named AsianInvestor's top Japanese asset owner and also commended for its innovation in our Institution Excellence Awards 2018, doesn’t have a stipulated allocation to alternatives in its suggested policy asset mix.

But its operating guidelines allow it to put up to 5% of its assets into alternatives.

Japanese institutional investors have generally sought to raise their allocations to both overseas and alternative assets, at a time when domestic government 10-year bond yields are virtually zero. GPIF – which is conservatively run and cannot invest money on its own behalf – has typically invested 80% of its assets via passive external fund managers.

But the pension fund giant has expressed a rising interest to invest into alternatives.

In January it appointed Canada's Stepstone Infrastructure and Real Estate as its first infrastructure manager, and afterwards added Pantheon Group and then DBJ Asset Management. It also awarded its first real estate mandate in September. 

A GPIF spokeswoman did not reply to emailed questions from AsianInvestor over the fund's plans to increase its investments into alternatives.

ACTIVE EQUITY CONCERNS

Chief investment officer Hiromichi Mizuno has often expressed his cynicism about the ability of active equity fund managers to deliver performance above passive benchmarks over long periods. Indeed GPIF introduced a new fee structure in March that essentially pays active managers higher fees the more they outperform their benchmarks but only pays them a passive level if they fail to do so.

Mizuno has not greatly revealed his views on alternative fund allocations while at GPIF. His previous job, though, as a partner at UK private equity firm Coller Capital – he joined GPIF from there in January 2015 – suggests he is familiar with the asset class.

To help improve returns in a low-yield environment, GPIF has been reducing its domestic bond exposure, which stood at 25.26% at the end of September, just a fraction above the 25% floor of its suggested domestic bond allocation. This is set at 35% but can deviate by up to 10%.

GPIF's domestic and international equity exposure, in contrast, has been broadly rising and amounted to 51.35% of its total AUM.

For the pension fund giant to add alternatives into its AUM would make sense, as it would help the ultra-long-term investor secure illiquid asset returns over fund lifespans that typically last for up to 10 years. It reported a return on investments of 3.42% for the second quarter of its 2018-2019 financial year.

Japan’s other monolithic investor, Japan Post Bank, has also demonstrated a rising desire to shovel billions into alternatives. It hired a new investment team to help build allocations to real estate, private equity and hedge funds in 2015, and in January 2018 it cooperated with Japan Post Insurance to establish the $1.1 billion Japan Post Investment Corporation.

The private equity fund, which is run by Takehiko Shimizu, aims to co-invest into private equity deals alongside other large general partners.