GPIF vs. Canadian, US Models. Who Wins?
(October 1, 2012) — How does Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension with $1.4 trillion in assets, compare with the Canadian and American approaches to managing enormous pools of wealth?
One academic paper aims to find out.
The paper, written by Nobusuke Tamaki of Otsuma Women’s University, notes how the GPIF’s market investment has become an important component of Japanese pension policy. Tamaki writes that GPIF’s investment program can be viewed from three different perspectives. “The first is asset allocation and performance,” the author explains. “This policy asset mix is expected to provide, over the long horizon, a rate of return that is 1.1% above the rate of change in nominal wages…In the last 10 years (2001–2010), the average nominal rate of return was 1.57% per annum, versus an average rate of change in nominal wages of -0.58% per annum; thus, the actual excess return was 2.16%. This excess return method is consistent with the structure of the Pension Programs, in which future benefits are closely related to the nominal wage level. In recent years, nominal benefits have been reduced in light of Japan’s deflationary environment.”
According to the research, the second perspective with viewing GPIF is the extensive use of external managers. “GPIF is a tiny institution in relation to its asset size, with fewer than 80 employees. Most of the fund is managed by 28 external managers, operating with 77 mandates as of the end of March 2011,” the paper notes. Because competition among the external managers and the large scale of each contract, investment management fees are maintained at a very low level, ranging from an average of 0.01% for domestic bond funds to an average of 0.06% for international bond funds.
The third perspective? Investment style. Approximately four-fifths of the assets are invested passively, following predetermined market indices. “The important factor here is the fund size in relation to the size of the market of respective asset classes. For example, GPIF had ¥12.0 trillion (US$153.85 billion) in domestic stocks at the end of 2011, which is approximately 7.5% of the total capitalization of stocks in the TOPIX index; this would make it very challenging to beat the market by actively choosing stocks,” the author continues.
GPIF’s assets consist mostly of investment-grade bonds along with publicly traded stocks. In contrast to other large public pension reserve funds (PPRFs) such as the Canada Pension Plan Investment Board (CPPIB) and a growing number of US institutional investors, GPIF has no exposure to private equity, hedge funds, real estate, commodity, or infrastructure. The most striking difference between GPIF and other highly regarded schemes, such as the CPPIB, the author says, is asset size. “In this respect, GPIF is 10 times as large as CPPIB. In order for GPIF to obtain a meaningful increase in its rate of return and in diversification for the total fund…the absolute dollar allocation to alternative assets will be much larger than for smaller funds such as CPPIB. The law of diminishing rate of returns works more strongly against a large investor in a more illiquid market, where fund size does matter,” the paper asserts.
Yet, while these factors should make GPIF especially cautious, GPIF has not ruled out the possibility of further diversification in the future. In 2009, the Investment Committee discussed alternative investments, and decided alternative assets would not be included into the portfolio in the immediate future.
Read the full paper here, titled “Managing Public Pension Reserve Funds.”