Surging Equities Fuel Japanese Pension Giant’s 23% Return in Fiscal 2023

Strong returns from its equity portfolios fueled Japan’s Government Pension Investment Fund’s 22.67% investment return for the fiscal year that ended March 31, when the pension giant had a total asset value of almost 246 trillion yen ($1.68 trillion), according to the GPIF’s 2023 annual report. That value has since risen to $1.73 trillion after the pension fund reported a 3.85% gain for the first quarter of fiscal 2024.

“Fiscal 2023 started in an environment where it was difficult to predict a significant rise in risk asset prices, due to the bankruptcies of some financial institutions in the United States and Europe at the end of fiscal 2022 and the continued rise in U.S. government bond yields,” the GPIF wrote in the report. “Looking back on domestic and international developments over the past year, war risks and geopolitical risks have heightened, and nationalism [has] spread further.”

Domestic equities were the top-performing assets for the pension fund during the fiscal year, returning 41.41%, followed closely by foreign equities, which earned 40.06%. The GPIF’s foreign bonds portfolio returned 15.83% for the fiscal year, while its investments in domestic bonds lost 2%.

The GPIF said that over the past four years, it has been refining its investment methodology by focusing on bringing the portfolio more in line with its policy asset mix, while seeking out “stable excess returns.” During fiscal 2023, according to the pension fund, it worked toward reducing risks that do not exist in the policy asset mix, such as spread products like corporate bonds. It also established a methodology to measure alternative asset performance by benchmarking against traditional assets and made efforts to improve the performance of ESG indices by engaging with index providers.

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“As a result, it has become possible to reduce the tracking error against the benchmark and therefore to further strengthen efforts to secure excess stable returns,” the GPIF wrote. The pension fund added that “it is extremely difficult” for its portfolio to earn an excess return of 1% or more while maintaining the current level of market risk within its policy asset mix.

“However, if we are able to consistently generate 0.1% or 0.2% of excess return every year, the compounding of even such small incremental returns will add up to a significantly large amount of profit over the long run,” the pension fund wrote in the report.