For the First Time, Japan's GPIF Pursues Emerging Markets

(August 22, 2011) — Japan’s government pension investment fund is beginning to invest in emerging markets for the first time.

During the next year, the Government Pension Investment Fund (GPIF), the world’s largest, will decide which of the 50 or so asset managers competing to win a portion of the allocation it will hire, the scheme’s president Takahiro Mitani told the Financial Times. The March 11 earthquake and tsunami delayed the scheme’s investment in the asset class.

“Even though emerging markets have gotten bigger, liquidity is not as high as in developed economy markets, so they are not all markets where you can suddenly get [funds] and soon go in and buy,” Mitani told the news service.

The pension is traditionally a conservative investor, with more than two-thirds of its assets historically in Japanese government bonds. Mitani has been quoted as saying that while some say the GPIF should invest in high-risk and high-return products, the GPIF will continue taking a safe and effective approach based on a long-term view rather than a short-term one. “In 2008, when we saw the financial crisis after the collapse of Lehman, while we posted a negative result we were relatively better off than overseas pension funds thanks to our conservative, cautious stance,” he told the Wall Street Journal last October. “We posted only single-digit [percentage] loss while others posted double-digit loss.”

As of June 2010, about 9% of GPIF’s total assets, or 10.6 trillion yen out of 116.8 trillion yen, were held in foreign equities. Its portfolio targeted a 67% allocation to domestic bonds, 11% to domestic stocks, 9% to foreign stocks, 8% to foreign bonds and 5% to short-term assets.

The move to increasingly diversify and invest in riskier assets to improve returns comes after Japan’s mammoth public pension plan took an investment loss of about ¥300 billion ($3.6 billion) in the 2010 fiscal year ending March 31, 2011. The GPIF blamed the loss on the weakness of domestic stocks and foreign bonds tied to the yen’s prolonged strength and to fallout from the March 11 earthquake. The principal reason for the fund’s anemic performance was the strength of the yen, which ate into the pension fund’s strong returns from foreign equities. Overall investment yield in fiscal year 2010 sank to minus 0.25%–a far cry from the fund’s 7.91% return the year before. The fund’s return in fiscal year 2009 topped ¥9.18 trillion ($110.3 billion), the highest return ever generated by the GPIF.

Mitani’s move toward emerging markets also echoes recent moves by Japan’s Pension Fund Association (PFA), which has said it must take on more risk to boost returns as the proportion of people over 65 years old in Japan stands at a record 21%. The fund plans to take on additional risk largely by pumping up its private equity investments, which now account for less than 1% of its entire portfolio. “We need to lessen our dependence of beta return,” Daisuke Hamaguchi, the CIO of the PFA, told the WSJ. “We are making private equity investments and hedge fund investments in an effort to make more alpha return.”