The past few years have amply demonstrated why the world’s most successful asset owners combine process discipline with hard work, talented personnel and a willingness to embrace new opportunities.
Some of this year’s winners demonstrated global standards of sophistication and knowhow, while others have been expanding their capabilities amid increasingly unpredictable market conditions.
It was not easy to pick the winners. In addition to gaining self-nominations, we sought out the advice of some of the most talented and experienced advisers and consultants in the markets. And we invited a small panel of judges to volunteer their expertise and knowledge to assess applicants, and suggest their own. That still led to some highly competitive categories, in which we had to choose between impressive organisations.
These awards are a testament to the dedication with which the region’s best institutions take the management of their assets. As the world increasingly traverses a period of political uncertainty and inferior fixed rate returns, the need for investors to be nimble and open to new ideas will continue to mount.
We explain how Hong Kong Jockey Club impressed in its home market and why we felt Government Pension Investment Fund deserved the top accolade for Japan.
Hong Kong Jockey Club
As Hong Kong’s largest taxpayer and the organiser of its most famous and lucrative sports events, the Jockey Club has always had a prominent role in the city. And, while making a lot of money from the city’s gambling culture, it is mandated to give charitably and invest sensibly.
The endowment has also continued to make build its resources as an investor. This included it establishing an investment risk unit in 2018, which works alongside quarterly reviews and a regular internal audit of the investment office’s internal controls to ensure the fund is keeping its risks under control.
The Jockey Club has also sought to keep its employees well-skilled in their jobs, and this included it offering training to its investment office staff about the new risk management system that it created, as well as how its risk model works.
This has been increasingly important, given that the endowment has slowly expanded its investment portfolio to encompass a wide array of assets. Along with standard allocations to public equities and bonds, it has put money to work in riskier areas of fixed income such as high-yield credit, bank loans and emerging market debt to earn some extra yield.
In addition, it has delved into other private asset classes such as hedge funds, private credit and private equity.
This approach appears to be working. The club did not divulge specific performance figures, but it is understood that these asset configurations mean it has met its internal investment goals over three and five year horizons, as of mid-2019.
Government Pension Investment Fund
The largest pension fund in the world has continued to reap the rewards of its ongoing innovation efforts, despite some ghastly markets.
GPIF, which by law cannot internally invest in equities and invests over 85% of its assets passively, suffered a ¥14.8 trillion ($135.96 billion) loss in the last quarter of 2018. That dire performance was mostly down to terrible performance among the local and international stocks.
However, a market rebound in the first quarter of 2019 led the pension fund to earn well over 8% on foreign equity investments over the entire 2018/2019 fiscal year, even as local stock allocations remained negative. Its overall investment return was 1.52%, or ¥2.38 trillion, for the fiscal year. That’s not great, but a sharp turnaround from its third quarter plummet into the red.
It was also a testament to GPIF’s willingness to stay the course, and focus on asset diversification to weather difficult conditions. The fund’s performance since inception in 2006 has been 3.1%.
It’s worth noting that the pension fund cannot by law drop its exposure to (negative yielding) Japanese Government Bonds to less than 25%. That has forced it to get creative. One way it did so was to combine its cash holdings into its minimum required domestic bond allocation. The pension fund’s local bond holdings stood at 26.3% as of March 2019, down about one percentage point from six months before.
Meanwhile the fund added infrastructure and real estate investments in the fund-of-funds structure in 2018, which has helped enhance GPIF’s risk management for alternative assets, an area where it wants to eventually lift its investments to over 3%.
In addition to its new performance fee model, the pension fund’s efforts to ensure its external managers embody ESG concepts when investing should ensure it is a force for good in the investment industry. As part of these efforts, GPIF partnered with the World Bank in April to promote green, social and sustainability bonds, while it created a similar initiative with the European Investment Bank in June.
For GPIF, and Japan’s future generations of retirees, this focus on expanding ESG is likely to be a good thing.