GPIF to monitor risk, profitability after strong Q4 results
Timing is everything, as the saying goes.
For Japan’s Government Pension Investment Fund (GPIF), the timing of its fiscal year ending each March 31 meant that it could present a positive rate of return of 1.5% for fiscal year 2022 (FY2022) ending March 31, 2023, its annual report released July 7 shows.
A 5.41% return in FY2022 Q4 was able to balance out negative returns of the three previous quarters. Its equities portfolio in particular helped the performance with returns of 8.19% for foreign equities and 7.03% for domestic equities, lifting the FY22 performance to 1.84% and 5.54%, respectively.
Eiji Ueda, CIO at GPIF, pointed out large market fluctuations throughout 2022, making it a year where it was “hard to see the direction” meaning that GPIF's risk management ability was ”tested”. He was therefore pleased with the Q4 rebound.
“The fact that we were able to secure a moderate return was a very significant achievement,” Ueda wrote in the annual report.
Foreign bonds (4.33%) and domestic bonds (2.12%) also performed well in Q4. However, the FY2022 ended with negative returns of -0.12% and -1.74%, respectively.
It is also worth noting that although alternative investments took up only 1.38% of AUM, the rate of time-weighted investment return on total alternative assets for FY2022 was 9.45%. The remaining 98.62% of the portfolio is about evenly distributed among domestic equities, domestic bonds, overseas equities and overseas bonds.
Overall, GPIF’s total assets under management stood just above ¥200 trillion ($1.4 trillion) by end-March 2023.
Going forward, GPIF will not seek to further increase the amount of risk “too much” to boost performance, according to Ueda. Instead, the CIO will focus on how much it can improve profitability within the portfolio, for instance within actively managed mandates.
“In terms of assets, even 0.1% is a difference of about ¥200 billion yen. Therefore, efforts to earn excess returns are very important,” Ueda said.
BEATING PEERS
The first three quarters of FY2022 was heavily influenced by the market turmoil in 2022, Ueda pointed out.
“As a result, in the 2022 calendar year, we had four quarters with consecutive negative returns (total -4.78%) for the first time since the founding of the GPIF,” he wrote.
A Tokyo-based investment adviser familiar with GPIF's investment strategy pointed out that Ueda insisted that this performance was better than peers globally, such as California Public Employees' Retirement System (CalPERS) with an annual 2022 return of -11.2%, Norway’s Government Pension Fund Global (-7.93%) and Korea’s National Pension Service (-8.28%).
“And he showed that they could earn excess return of 0.18% from mixed benchmark of policy asset allocation in the three years after he assumed the position of CIO,” the investment adviser told AsianInvestor, under condition of anonymity. Ueda became CIO in April 2020 and in 2022 got his term extended another two years through March 2024.
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Ueda himself pointed out that each country has different target rates of return and portfolios, making a simple comparison impossible due to differences in foreign exchange levels and stock market conditions.
For instance, GPIF has a relatively high exposure to domestic stocks (24.49% as of end-March 2023) which performed relatively well in 2022, the CIO noted. The benchmark index Nikkei 225 finished the year down 9.4%, its first yearly fall in four years.
However, the US S&P 500 index closed 2022 with a total return of -18.1%, its worst annual return since the global financial crisis around 2008, while the Nasdaq-100 closed at -32.97%. All of these indexes have since bounced back since the start of 2023.
“The effect of the depreciation of the yen suppressed the negative impact of overseas assets. As a result, it is assumed that the overall negative margin was eased,” Ueda wrote.
The Tokyo-based investment adviser also noted that GPIF in FY2022 hired 19 active equity managers managing a total ¥2 trillion for the North America markets, and added ¥1 trillion for new mandates in passively managed funds.
“In the process of selection of active managers, they got data from managers and they calculate hypothetical returns of the options which managers hadn’t selected by using simulations,” he said.