The Government Pension Investment Fund closed its financial year on 31 March 2015 with a portfolio worth a record 137.5 trillion yen thanks to its best investment performance since 2001 when it replaced the old Nenpuku.
The world’s largest institutional investor had closed the previous year with assets of 126.6tr yen on which its newly published annual report shows it made a return of 12.17%. This would have brought total holdings to 142.1tr yen.
However GPIF now has more
going out in pensions each year than it has coming in via contributions and has to use part of its income to meet its benefits bill. It had previously forecast that the drawdown for this purpose in the 2014/15 year would need to be 5.5tr yen and that seems to have been almost the case.
Its sparkling investment performance was aided by a re-allocation of its portfolio, a boom in local stocks, a decline in the value of the yen which boosted the value of foreign investments and continued shrinkage in its holdings of Fiscal Investment & Loan Program (FILP) paper which were once forced on it by the Ministry of Finance.
Asset allocation has been adjusted over the year towards a new policy mix introduced after both internal and external reviews of the Fund’s operations. All the big shifts now to seem to be in place with little need to do more than opportunistic buying on dips and re-balancing in response to market movements.
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Asset allocation financial year 2013 Asset allocation in financial 2014 year (Please note correction in posting above.)
The new policy mix is: domestic bonds 35% plus or minus 10%, domestic equities 25% plus or minus 9%, international bonds 15% plus or minus 4% and international equities 25% plus or minus 8%. It is from the Japanese bonds segment, which is largely managed inhouse, that any funds necessary to make up the shortfall between contributions and benefits payment are taken.
Domestic equities holdings have risen from 20.8tr yen at 31 March 2014 (when they accounted for 16.47% of holdings) to 31.7tr yen (or 22%) a year later, a rise of 52%. During this time the Nikkei 225 index rose 28.64%.
Foreign stocks have climbed over the same time from 14tr yen (15.6% of the portfolio) to 20.1tr yen (21%) a 43.6% jump. During the period the yen moved from 103.01 yen = US$1 to 119.99yen =US$1 – a decline which would have boosted the value of overseas equities by 16.4%.
GPIF’s long running exit from FILPs continued last year and they are now down to a book value of 5tr yen (or a wholly theoretical market value of 5.2tr) compared with over 30tr yen a decade ago. As this paper matures the proceeds are directed to other investments and FILP holdings should disappear entirely within two to three years (see table at top).
As with its third quarter report, the Fund omits any mention in its annual round up of how performance in the various components of its portfolio measured up to their benchmarks.
Having broken its old asset allocation mold the Fund now needs to tackle transparency and start publishing not just its investment results but a full income and expenditure statement each year.
This also needs to include forward projections of its benefits burden and to show how much it expects to draw down each year to meet its commitments.
It should also publish the result of its five yearly actuarial reviews views in a timely way and think about making these assessments more frequent.
During the heated debate on its future the Fund said that in about 10 years time it would enter a period in which contributions outweighed benefits before the current position reasserted itself some years later (see archive November 2014 Investing pensions: Plus ça change, plus c’est la même chose).
It produced no evidence for this assertion and the demographic data do not support it.
GPIF has often said that it will not invest in hedge funds until they become more transparent but while its present allocation to ‘alternatives’ is 0% that can grow within the bounds of the current policy mix to 5%.
More openness from within will help money management firms to design products tailored to the Fund’s needs and for which it can strongly suggest the reporting standards required.
The three tables under ‘The Giants’ tab above showing which asset management firms handle what for GPIF are up-to-date at 31 March 2014. They will shortly be replaced by those with newer statistics.
The large fall in the Fund’s allocation to domestic bonds saw external mandates for this segment reducing while the rise in allocations to Japanese equities brought Daiwa SB Investments and Schroders Investment Management (Japan) onto the roster.
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