Japan’s Government Pension Investment Fund Suffered Sharp Drop in 2010 FY

(July 7, 2011) – Japan’s mammoth public pension plan, the largest institutional investor in the world, took an investment loss of about ¥300 billion ($3.6 billion) in the 2010 fiscal year ending March 31, 2011, Nikkei.com has reported.

The Government Pension Investment Fund (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.

Total assets under management dropped 5% from the end of the 2009 fiscal year to ¥116 trillion ($1.4 trillion). About ¥97 trillion ($1.16 trillion) of that figure was invested in the market. Despite the drop, the pension fund remains larger than many countries’–including Canada’s–GDP.

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.

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The news of the fund’s weak performance prompted fears within Japan that the GPIF would be unable to support the coming wave of retiring beneficiaries. The GPIF announced July 6 that it had sold $59 billion worth of domestic bonds and foreign equities in the 2010 fiscal year to cover a shortfall in pension payouts, its second straight year it was forced to do so, Reuters has reported.

“A single-year minus will not have an immediate impact on pension benefits,” a senior GPIF official said of the investment loss, Nikkei.com reported.

Hit hard by the 2008 market collapse, pension funds throughout the world are embracing riskier asset classes to boost returns in anticipation of the retirement of their rapidly aging beneficiaries. Japanese pension plans in particular are increasingly turning to hedge funds to shore up underperforming asset levels, aiCIO has reported.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>

(July 7, 2011) — With the New York City’s Teachers’ Retirement System (TRS) still holding out, Comptroller John Liu has said hedge funds will assist the city’s schemes in further diversifying their portfolios moving forward following superior investment returns in fiscal year 2011.

“Hedge fund allocation is part of a larger strategy moving forward,” Michael Loughran, a spokesperson at the Office of NYC Comptroller, told aiCIO. “The asset class did not play a role in the fiscal year 2011 returns, but will assist the funds in further diversifying their portfolios.”

According to the Comptroller, the addition of new employees with greater experience in a broader range of asset classes helped to boost pension fund returns. New York City’s police, fire department and municipal employee pensions made their first hedge fund investments earlier this year, all hiring fund of hedge funds Permal Group.

In contrast, however, the $42.3 billion New York City’s Teachers’ Retirement System (TRS) has rejected an allocation to hedge funds. The pension’s investment board — which has been discussing possible changes to the retirement system’s asset mix — had been weighing the possibility of a 3% allocation to the sector, which could have totaled more than $1 billion, HMFWeek reported. However, despite the widespread popularity of the asset class especially following the financial crisis to boost returns, TRS decided not to pursue the investment “based on feedback from various discussions on this topic,” a member of the investment board told the publication.

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The city’s Comptroller announced that the New York City Pension Funds recorded investment returns of more than 20% in fiscal year 2011, which ended June 30, marking the first time in 13 years that the funds achieved such a high mark. The preliminary data indicated that the funds’ value at approximately $119 billion as of June 30, 2011, which exceeds the $115 billion pre-2008 crash peak, and the June 30, 2010 value of $97.8 billion.

“While the markets remain volatile, we have vigorously pursued a diversification strategy to enhance our returns while lowering pension costs to the City,” said Comptroller Liu in a statement. “This will protect pensioners and taxpayers alike in the long run. It has been gratifying to work closely with our dedicated Trustees to achieve these results.”

In comparison, public pension-fund assets in the United States rose 3.6% during the first three months of the year, the US Census Bureau reported June 30. In the first quarter, assets of the 100 largest plans grew by $93.9 billion to $2.73 trillion, up from $2.64 trillion on December 31.

Despite the gains in investment returns, New York City’s pension system is still deeply underfunded, which aiCIO investigated in its Spring issue, revealing the tension between the Mayor and Comptroller. Bloomberg’s goal to reform the City’s pensions operation has not been universally applauded. While Liu is responsible for overseeing New York City’s pension management, Bloomberg hired the City’s first chief investment advisor last year and brought on another senior professional to help run the system’s five pension boards. Insiders claim that Bloomberg favors greater attention to risk management and asset allocation and less emphasis on selecting asset managers, which is primarily Liu’s domain.

Click here to read “The End of the 3 and 30”, from the summer issue of aiCIO Magazine, which looks at how hedge funds-of-funds must adapt or perish.

To contact the aiCIO editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742