The executive board and management of Japan’s ¥200 trillion ($1.34 trillion) Government Pension Investment Fund (GPIF) have issued a stout defence of the fund’s peformance in fiscal 2022 (12 months ending March 2023).
Announcing its latest annual results on September 28, GPIF used the example of other large funds such as CalPERS in the US and the National Pension Service in Korea to illustrate the challenges faced by global investors.
“There is no other asset owner in the world that manages assets on the scale of ¥200 trillion,” said Chief Investment Officer Eiji Ueda.
He added that the sheer size of its portfolio makes it hard for GPIF to achieve the level of diversification set by the policy asset mix target.
“In such a market environment, we were able to secure a return of +1.5% (approximately ¥3 trillion) this fiscal year, equivalent to the policy asset mix return (composite benchmark return). We regard this as a significant milestone,” said GPIF President, Masataka Miyazono.
In 2022, unlike 2020 and 2021, market volatility remained high throughout the year. Under these conditions, GPIF recorded a negative rate of investment return for four consecutive quarters (-4.78%) in the 2022 calendar year, for the first time since the fund was established in 2006.
“These negative numbers may be concerning,” said Ueda. “However, we believe that the diversification effect of the GPIF policy asset mix worked well.”
To illustrate this point, GPIF makes the comparison with other public pension funds, such as CalPERS, whose return in 2022 was -11.2% and Korea’s NPS, which recorded a loss of -8.28%.
GPIF acknowledges that a direct comparison is quite difficult, because the target rates of investment return and portfolios of each asset owner differ.
But, "it can be inferred that the overall negative impact was mitigated (by GPIF), partly because the performance of Japanese equities, which comprise a large proportion of the policy asset mix, was relatively good, and the impact of declines in overseas assets was softened by the depreciation of the yen," said the fund in its annual report.
Looking at the investment return since October 2014, when GPIF's asset allocation was changed to 50% for equities, the excess return over the 10 year Japanese government bonds is approximately 4%.
"This excess return is comparable to CalPERS, whose asset allocation ratio toward stocks and real assets exceeds 70%," said Ueda.
This analysis indicates that GPIF's current policy asset mix, consisting of 50% foreign assets, is well designed as a long-term diversified investment portfolio, he added.
In 2022, as part of its effort to further diversify and upgrade the risk-adjusted basis of returns, GPIF began using stock index futures for foreign equities, having already introduced them for domestic equities in fiscal 2021.
"By using stock index futures, which can be traded quickly, we can compress the time from investment decision to execution, and therefore expect to reduce the price fluctuation risk in rebalancing," said Ueda.
GPIF has also established a special portfolio management team to make it possible to rebalance in a more timely and appropriate manner, given the often rapid changes in the market environment.
The fund had previously indicated its intention to increase the allocation to foreign assets, particularly in North America, and to expand its alternative investments.
In 2022 it selected 19 fund managers, entrusting them with approximately ¥2 trillion in total. At the same time, in order to balance out the risk to the portfolio, GPIF adopted several new indexes and invested approximately ¥1 trillion as a passive investor.
The portfolio breakdown by region shows North America with the largest share at 69%, followed by Europe and Asia Pacific.
By sector, information technology accounted for the largest share (38%), while other investments were diversified across a wide range of industries, including healthcare and consumer discretionary.