Government Pension Investment Fund of Japan, one of the world's largest pension funds, aims to more than double its exposure to alternative investments in the medium term as part of its diversification strategy after it reported a record return for the fiscal year ended March 31.
For the 12 months ended March 31, the fund's investment return reached 25.1%. The record gain was in part due to its shift toward more foreign bonds and fewer domestic bonds, a strategy that the fund plans to continue with in the medium term, Masataka Miyazono, GPIF's president, said at a press conference July 2.
In addition, the fund also plans to increase the portion of alternative investments in infrastructure, real estate and private equity funds to 1.6% of its portfolio in the medium term. In the fiscal year ended March 31, these assets totaled ¥1.3 trillion, or 0.7% of the portfolio, compared with ¥944.5 billion in the previous fiscal year, according to GPIF.
"We'll need to diversify our investments," Miyazono said, without giving more details.
GPIF has been under pressure to seek higher returns while returns on its domestic investments, particularly bonds, have been hit by chronically low interest rates. For instance, the yield on the 10-year Japanese government bond is around 0.03%, much lower than the 1.46% yield on comparable debt in the U.S. and around 3% in China.
As part of the fund's quest for higher returns, Miyazono said GPIF has to be cautious while deciding whether or not to invest in Chinese sovereign bonds. British index provider FTSE Russel said in March that from October, it will include Chinese sovereign bonds in the FTSE World Government Bond Index, which is also the benchmark for GPIF in foreign bond investments.
Investing in Chinese government bonds is "an option, given the [higher] yields," Miyazono said, adding that it will also need to consider the liquidity of such debt.
Stellar year
In the fiscal year ended March 31, GPIF changed its policy of allocating 25% each to bonds and stocks inside and outside Japan. That was different from the previous fiscal year, when foreign bonds accounted for 15% and domestic bonds made up 35%.
GPIF earned a 7.0% return from its foreign bonds investment in the last fiscal year, the biggest in six years. It was also twice as much as the 3.5% from the previous fiscal year. The fund also reported a loss of 0.6% from domestic bonds, widening the 0.3% loss from the previous fiscal year.
Supported by a rally in global stock markets, GPIF's funds allocation to that segment in Japan took a healthy return of 41.5% in the last fiscal year, a turnaround from a loss of 9.7%. Its overseas equity investment reported a 59.4% return, also a significant improvement from a loss of 13% a year earlier. The return from its domestic and overseas stock investments in the last fiscal year marked the highest in at least 10 years.
The fund's total assets also rose to a record high of about ¥186.2 trillion. Japan's Nikkei average index jumped 63% in the fiscal year ended March 31.
"We're not expecting a rally in the stock markets this year as seen last year but we'll allocate funds based on our portfolio strategy," said Miyazono, adding that he would not provide more details about future asset allocation to avoid an impact on the financial market.
As of July 1, US$1 was equivalent to ¥111.59.
