Japan pension giants post high single-digit quarterly gains

Japan's pension funds are showing signs of improving investment performance.

Government Pension Investment Fund (GPIF) posted investment returns of above 9% during the second quarter of 2023, similar to the report card for Pension Fund Association for Local Government Officials, known by its shorter Japanese moniker Chikyoren both posted returns 

For GPIF, the world's largest pension fund, the rate of investment return from April 1 to June 30, 2023 (the first quarter (Q1) of the fiscal year 2023 (FY2023) in Japan) was 9.49%, according to the quarterly report.

This was despite the fund posting returns that were slightly below benchmark in some asset classes.

Foreign equities and domestic equities particularly performed well in Q1, with investment returns of 15.43% and 14.37%, respectively. Foreign bonds made 8.08% while domestic bonds made 0.36% in a portfolio that is roughly equally allocated to the four categories.

Although the returns are positive in more than one way, it is worth noting that GPIF’s foreign equities portfolio performed 6 basis points (or 0.06 percentage points) below its benchmark, the MSCI ACWI index excluding Japanese assets.

Likewise, domestic equities performed 8 basis points/0.08% percentage points below benchmark, the TOPIX index.

This below benchmark performance would not likely be seen as optimal, a Tokyo-based investment adviser familiar with GPIF's investment strategy also noted to AsianInvestor.

He pointed out that GPIF in FY2022 hired 19 active equity managers managing a total ¥2 trillion for the North America markets, with the idea that active equity managers can deliver alpha against indexes.

“GPIF warned in the president’s comment that this Q1 result was great, but was just a short-term result and also could be observed once in nine years,” the investment advisor said.

Also read: GPIF to monitor risk, profitability after strong Q4 results

Domestic bonds also performed below benchmark, the NOMURA-BPI non-ABS, by 5 basis points/0.05 percentage points, while foreign bonds performed 28 basis points/0.28 percentage points above the benchmark, the FTSE World Government Bond Index excluding Japanese assets.

The Q1 performance brought GPIF’s total assets to ¥219.2 trillion ($1.53 trillion) by June 30. The share of alternative investments, capped at 5% of total assets, was 1.47% or ¥3.2 trillion.

BONDS GOOD, EQUITIES BAD

Chikyoren, Japan’s second-largest pension fund, had a similar performance to GPIF during the first fiscal quarter of FY2023.

As the total AUM is spread across different funds with various portfolio compositions, a total performance is not published. However, all funds each managed a positive return in Q1 FY2023, according to released reports.

Chikyoren uses the returns from a specific pension fund – the Employees’ Pension Insurance Benefit Adjustment Fund (EPF) – to show its performance after considering the structural changes from pension plan integration in 2015 in Japan.

This fund tracks the portfolio structure of GPIF – as well as the same benchmark indexes. This structure means a roughly even, four-way split of assets across domestic and foreign equities and fixed income, with a marginal allocation to alternatives capped at 5% of total assets – and 2% as of June 30.

Also read: Chikyoren sees positive returns on strong Q4 results

The EPF made an investment return of 9.47% in Q1, 2 basis points/0.02 percentage points below GPIF’s performance. Foreign equities and domestic equities made returns of 15.28 % and 14.33%, respectively. Foreign bonds made 7.81% while domestic bonds made 0.50%.

EPF’s foreign equities portfolio performed 21 basis points/0.21 percentage points below benchmark. Likewise, domestic equities performed 12 basis points/0.12% percentage points below benchmark.

In contrast, foreign bonds and domestic bonds performed above benchmark by 1 basis point/0.01 percentage points and 9 basis point/0.09 percentage points, respectively.

The market value of Chikyoren’s total AUM as of June 30 stood at ¥55.8 trillion ($389.7 billion). This total AUM includes both pension funds and mutual aid associations for public entities including regional civil servants, teachers and police.

With the strong performance by foreign equities, the Tokyo-based investment adviser pointed out that GPIF and Chikyoren’s similar portfolios now had a foreign equity allocation surplus of 110 basis points/1.1 percentage points and 100/1 percentage point in total portfolio composition.

“Compared to the asset allocation of 3 months prior, I suppose that these funds would do some rebalancing,” the adviser said.