Progress can sometimes appear piecemeal, as is the case with GPIF’s approach to alternatives. As a share of total investments, they remain tiny at the world's biggest pension fund.

Still, from a low base they do appear to be growing fast, driven by rising real estate investments. So indications in December that the pension fund was considering raising its allocation to alternatives to about 3% within three years may yet come to pass as they build out their capabilities.

As a share of assets under management, GPIF's portfolio of alternatives almost trebled in the fiscal year to March-end to 0.36% from 0.13% 

That equates to some pretty big nominal numbers given GPIF's total AUM of ¥159.2 trillion ($1.46 trillion): a rise to ¥432.7 billion from ¥212 billion a year earlier.

But there's still a long way to go before its defined alternatives investment cap of 5% is hit, let alone the 3% target. One Tokyo-based investment adviser familiar with GPIF’s investment strategy told AsianInvestor on condition of anonymity that its current level of investment in alternatives matched the pension group's existing internal capabilities.

A breakdown of GPIF's alternatives holdings by asset class, as reported in the pension fund's annual report after a mixed set of results, shows 67.8% in infrastructure, 28.9% in real estate and 3.3% in private equity.

While GPIF is building the investment teams within each alternatives asset type from scratch, it has in the meantime needed to hire managers specialising in funds of funds.

“[The continuously low alternatives allocation] could be because GPIF took too much time in selecting managers,” the investment advisor said, hinting at a slightly bureaucratic process with formal requests for proposals from asset managers followed by protracted due diligence.

But that's okay, as far the adviser is concerned. 

“Considering the limited investment opportunities and that [we are] currently thought [to be at a] late stage in the investment cycle, I think they should continue investment processes naturally," he said. “They need to focus on building up investment capabilities in order not to miss investment opportunities when they come as the cycle enters a new stage.” 

Change is nonetheless on its way, albeit slowly.

GPIF has been working to expand the framework for more swift and direct alternatives investments. In June 2018, the pension fund received regulatory clearance to participate in limited partnership schemes for alternative assets. Until then, because of statutory limitations, the pension fund had only been able to invest in alternative assets through funds of funds or mutual funds.

GPIF has also started a process that will eventually lead to a call for applications from alternative asset managers for limited partnerships. A similar call for fund of funds asset managers was launched in April 2017.

More recently, in June, GPIF made a request for information on private debt research, indicating that this alternatives sub-asset type of investment is also under consideration by the pension fund.

BUILDING REAL ESTATE

Posting the biggest percentage annual increase among the alternatives sub-asset types was real estate, which saw its holdings jump some 15-fold to ¥124.9 billion as of March-end 2019.

The split between domestic and overseas real estate was ¥70.4 billion and ¥54.5 billion, respectively, as of fiscal year-end.

But it may have since become more weighted towards the latter after GPIF announced its first global fund of funds real estate mandate last September. This was awarded to CBRE Global Investment Partners (CBRE GIP).

One source who is familiar with GPIF’s real estate investment strategy told AsianInvestor that CBRE GIP has now deployed all the capital earmarked for this year, principally to regional open-ended core investment vehicles with a focus on low-risk income-based assets.
 
The source said CBRE GIP had spread around ¥10 billion each to 15 investment vehicles globally, suggesting GPIF may have allocated another ¥95 billion to overseas property since the end of the last fiscal year.
 
One investment was indirectly disclosed in GPIF's new annual report released last week. It included a photo of a life science complex near the campus of Massachusetts Institute of Technology in Cambridge near Boston. The photo text shows the asset was bought in May, the same month Chicago-based investment management firm Harrison Street reportedly headed a partnership to buy the three buildings.
 
GPIF could not be immediately reached for comment on the matter.

Another consultant familiar with GPIF’s investment strategy said the Harrison Street ticket serves as a good example of how to get a relatively comprehensive diversification in the US commercial real estate market.

While the fund of funds approach is seen as providing a comprehensive foundation for global  diversification, the next likely step could be more specific strategies within limited partnership schemes.