Japan’s Chikyoren sees positive returns on strong Q4 results

Japan’s Pension Fund Association for Local Government Officials, known by its shorter Japanese moniker Chikyoren, saw positive returns for the fiscal year 2022 (FY2022) ending March 31, 2023.

As the total AUM is spread across different funds, a total performance is not published. However, all funds each managed a positive return below 2% in FY2022, according to the FY2022 reports released in July. And for the fund allocating to alternative investments, this portfolio mix lifted performance further.

Total assets under management (AUM) as of end-FY2022 stood at ¥51.9 trillion ($372.2 billion). This total AUM includes both pension funds and mutual aid associations for public entities including regional civil servants, teachers and police.

STRONG Q4

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

This fund tracks the portfolio structure of Japan’s Government Pension Investment Fund, the world’s largest pension fund. This structure means a roughly even, four-way split of assets across domestic and foreign equities and fixed income.

The EPF AUM stood at ¥14 trillion by end-FY2022, according to the fund’s FY2022 report. The fund managed a positive return of 1.63% in FY2022, compared to GPIF’s 1.5% for the same period. This takes the EPF average investment return to 4.31% over the last 15 years.

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

Within Chikyoren’s EPF portfolio, domestic equities (25.7% of the EPF portfolio by end-FY2022) contributed most positively with a 5.73% return in FY2022. Foreign equities (25.3%) and foreign fixed income (24.6%) contributed with 1.99% and 0.2%, respectively.

Only domestic fixed income including short-term assets (24.4%) was negative in FY2022 with -1.64%. For all classes, performance improved significantly in Q4 of FY2022, as both Japanese and overseas financial markets surged in early 2023 following a weak performance in 2022.

“Growth stocks, which are sensitive to interest rate trends, underperformed. Accordingly, we strived to diversify our investment styles while striving to secure stable excess returns,” the EPF management wrote in the annual report.

A Tokyo-based investment adviser familiar with Chikyoren's investment strategy also noted to AsianInvestor that the EPF had hired two active domestic equities managers, a private debt manager within alternative investments and two ESG active funds in foreign equities area.

ABOVE BENCHMARK

For Chikyoren’s EPF, only domestic fixed income performed below benchmark indexes, by 0.09 percentage points/9 basis points. Overall, the EPF exceeded the total benchmark by 0.07 percentage points/7 basis points with the 1.63% overall return against the benchmark return of 1.57%.

As it is the case for GPIF, Chikyoren’s EPF is allowed to allocate up to 5% of the portfolio’s assets in private markets. These alternative investments made up 1.9% of the portfolio, or ¥265 billion, as of end-FY2022, up from 1.4% by end-end FY2021. In comparison, alternatives made up 1.38% of GPIF’s portfolio by end-FY2022.

The Tokyo-based investment adviser familiar with Chikyoren's investment strategy pointed out that although marginal, the alternatives portfolio contributed positively to the performance of EPF, lifting it higher above benchmarks.

“Regarding excess return, [the EPF] performed 0.67 percentage points (over benchmark) in foreign fixed income. More than half of that came from real estate which is classified in this asset class. Similarly, private equity gave some positive effect in the excess return of the foreign equities asset class,” the investment adviser told AsianInvestor, under condition of anonymity.