Thailand’s Government Pension Fund (GPF) places high emphasis on environment, social and governance (ESG) when it selects investment managers, and expects them to deliver alpha using a bottom-up approach, a senior investment official told AsianInvestor.
The fund uses external managers for a wide variety of investments, said Man Juttijudata, deputy secretary general responsible for investment strategy, fund management and sustainable investments.
"We use external managers for developed and emerging market equities, investment grade corporate bonds, emerging market debt as well as global infrastructure, real estate and private equity," he said.
The $13 billion pension fund is one of the more advanced institutional investors in Southeast Asia, outside of Singapore, investing in overseas markets and in fairly complex asset classes such as private equity, infrastructure and real estate.
About 60% of GPF's investment assets was invested broadly in fixed income, 22% was in alternatives such as real estate and infrastructure and about 18% was in equities, at the end of March.
The fund uses external asset managers for managing its overseas investments and a portion of its domestic investments. Up to 60% of assets can be invested overseas.
The state-owned fund has built a robust portfolio that is diversified in 18 asset classes, with the aim of achieving high real returns in the long term. The fund also actively uses tactical asset allocation across major asset classes to capitalise on market trends.
About $5.8 billion of assets are outsourced, spread across nine asset classes, 10 mandates and 46 managers in both public and private markets.
The fund has core and satellite portfolios, said Juttijudata.
“The satellite portfolio [where its manager platform is focused] is diversified among various investment strategies such as growth, equity, quality and momentum. When you have a combination of different styles there is lower risk, as the correlation between them is relatively lower,” he said.
The pension fund’s in-house investment team decides on the broad top-down investment approach and makes asset allocation decisions accordingly. The fund also decides if it wants to have a country or sectoral tilt, depending where it sees growth opportunities broadly.
“Once we define our expectations of growth, we want the fund manager to find alpha using a bottom-up approach,” said Juttijudata. A bottom-up approach focuses on individual investment selection.
The pension fund only has a few managers for each style of investing. “If they all have the same style, their investments could overlap and potentially, the alpha generated could be cancelled out,” he said. “We therefore have only one or two managers for each mandate.”
Managers are assessed and scored on various criteria, he said.
“We place a heavy score on the [manager’s] investment process. If they have a strong investment process, risk management systems, then they are likely to perform well. We don’t look only at historical performance.”
Manager longevity also matters to Juttijudata. “We place faith in people, on reliable managers who have stayed with a fund for a long time."
In addition, 10% of the manager scoring is devoted to ESG parameters, including policies around sustainability.
“We assess if ESG is integrated into the investment process. Ideally, we don’t want these to be separate,” the veteran investment professional said.
GPF recognises the importance of ESG and believes that investments should generate a decent financial return for its members in the long run, while also generating positive impacts on society and the environment, he added.
The fund integrates ESG factors into its external fund managers’ selection process via questionnaires and the fund’s own due diligence process, he added.
After external fund managers are selected, GPF always meets and engages with executives of those fund managers regarding ESG operational issues to encourage and promote the implementation of ESG practices as agreed,” said Juttijudata, adding that the ESG performance of external fund managers is one of the criteria GPF uses to assess the overall performance of managers.
Other important elements include continuous engagement with the managers and ensuring they have strong reporting processes.
For the funds GPF manages internally, ESG factors are integrated into the investment management of the main asset classes.
ESG factors are integrated into 70% of the assets of members, while the balance is mainly invested in low-risk assets focused on capital preservation, such as government bonds and government debt instruments and short-term debt instruments to comply with regulations related to the pension fund.
In addition, to align with the United Nations Sustainable Development Goals, GPF has already set SDG11 (sustainable cities and communities), SDG12 (responsible consumption and production), and SDG13 (climate action) as its main goals.
“GPF has holdings in asset classes that can contribute directly to the progress of these goals. These SDGs also have a common theme of the bio-circular-green (BCG) economy which is relatable to many companies in its equity portfolio,” Juttijudata said.