Japan's $63bn university fund fully invested with 10% annual return
The ¥10 trillion ($63.3 billion) Japan University Fund (JUF) has become fully invested and swung into annual gain, posting a 10% return for its second full fiscal year ending March 31 (FY2023).
“Since the end of the previous fiscal year in March, we have finished our first stage of our portfolio development which means the fund is now as invested as it is meant to be, with a few percentages in cash as buffer,” Naoya Sugimoto, co-chief investment officer and head of the global investments department for JUF, told AsianInvestor.
Established in 2021, JUF started investing in March 2022, with a two-year initial investment period ending March this year. During this early stage, the fund focused on building a simple portfolio, initially eyeing government bonds in developed markets and subsequently adding equities.
“We have now started the second stage where we will gradually develop the initial portfolio with a transition plan for the composition of asset types. This stage is expected to take up to 10 years, but it could be completed sooner, depending on factors like market developments,” Sugimoto said.
The 10% return for FY2023 increased the total market value of JUF to ¥10.96 trillion at the end of March.
The new national endowment fund, managed by the Japan Science and Technology Agency (JST), has been given the objective of securing long-term and stable financial resources for Japanese universities so they can strengthen their academic research infrastructure. Investment returns will be used for grants where application is open for Japanese universities.
CASH BUFFER
Equities were JUF’s most profitable asset class in FY2023, yielding a return of 39.7%, while alternative investments made a gain of 19.3%. Fixed income investments reported a more modest return of 2.5%.
By the end of March, the portfolio was allocated as follows: 65.7% in fixed income, 25.7% in equities, and 2.8% in alternative investments. JUF employs a global investment approach, without distinguishing Japanese and overseas markets.
Short-term assets, or cash, comprised 5.8% of the portfolio. Part of them were the remaining seed capital to be deployed, but the cash share has been adjusted to the intended level since March.
Sugmoto, who is also a member of AsianInvestor's Editorial Advisory Board, explained, “Our cash reflects that we must keep a few percentages of the portfolio as buffer in case of capital calls for alternative investments as well potential rises in hedging costs if the yen depreciates, as we partially hedge currencies for our overseas investments,” he said.
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The initial approach during the just-concluded first stage was defensive due to downside risk observed in the public markets in 2022. This resulted in a negative return of 2.2% for FY2022, with 27.6% of the seed capital left uninvested.
The portfolio has therefore started off with a conservative asset allocation, based on a reference portfolio of 65% global fixed income and 35% global equities.
As the portfolio has been gradually constructed to diversify investment timing, JUF has charted its course of moving further into more active investments and overall optimization, Sugimoto explained.
GRANTS ACCUMULATING
Beyond investment returns, JUF also measures its success by the amount of capital accumulated for grants and the net income.
“We successfully secured a higher level of returns beyond what is needed for grants to be paid from the fund this year,” Sugimoto said.
In FY2023, the fund earned a net income of ¥116.7 billion available for grants. Combined with ¥68.1 billion from FY2022, this pool of capital will be available for applications from Japanese universities through a rigorous process.
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The amount of funds for research grants to Japanese universities will be determined separately from the net income made available by JUF, with the fund’s financial condition being one of the deciding factors.
The total amount of grants each fiscal year will be decided by the government within the limits of the capital pool for grants. Currently, Tohoku University is chosen as the first recipient of the funding as high as ¥10 billion per year.