Can GPIF maintain its groundbreaking 25% return?

The world’s largest pension fund greatly benefitted from its nearly 50% asset allocation to equities after the global stock rally since April last year.
Can GPIF maintain its groundbreaking 25% return?

The global stock rally that coincided with Japan’s Government Pension Investment Fund (GPIF)’s financial year contributed to its record return, but the same is unlikely to happen this year, both the fund and experts say.

GPIF on July 2 announced a record return of ¥37.8 trillion ($341 billion), or 25.15%, for its fiscal year that ended in March, a dramatic rebound from a 5.2% loss in fiscal 2019 that had been dragged down by the global equities slump.

This is the pension fund’s largest-ever return since its inception in 2001; its previous record was 12.3% in fiscal 2014.

Gary Smith, 
Sovereign Focus


“The return number for fiscal 2020 was extraordinarily high largely because the measurement period of April to March mapped neatly onto the bounce in equity markets that occurred after the first Covid lockdowns were announced,” Gary Smith, managing director with Sovereign Focus, told AsianInvestor.

The pension fund gained 59.42% from foreign equities investments, or ¥20.66 trillion, while domestic equities posted a 41.55% return.

However, a repeat of such numbers this year will be very unlikely, Smith added, even though the global stock rally is believed to continue in the second half of 2021.

The MSCI World Index rallied 52% from April 2020 to March this year, and the momentum has continued as the index hit another record high of 3,050 points on Monday (July 5).


GPIF President Masataka Miyazono also said during a press conference to announce the results that the ¥186.16 trillion fund is not expecting a similar stock rally this year, but did not elaborate on asset allocation strategies.

In the beginning of fiscal 2020, GPIF changed its asset allocation strategy for the first time since October 2014, by moving 10% of assets from Japanese bonds to foreign bonds.

GPIF Asset Allocation as of March 31, 2021 (Source: GPIF)

The fund's shift in strategy seemed to have helped as foreign bonds contributed a 7% return in fiscal 2020, while Japanese bonds suffered 0.68% loss.

In addition, its heavy allocation to growth tech funds proved worthwhile. Of the over 3,000 foreign stocks that GPIF has invested in, 12 in the top 20 companies by market value were growth technology companies, with Apple, Microsoft, Amazon, Facebook, and Google’s parent company Alphabet taking the top five positions.

In the first three months of 2021, GPIF's return from foreign stocks was 12% in the period, while Japanese equities gained 9.3%.

Tech stocks have performed extremely well. On July 2, the tech-heavy Nasdaq Composite reached a record high of 14,649 points; the index had surged 96% since April 2020.

Domestically, GPIF is invested in more than 2,000 companies of which the top equity positions went to Toyota, Sony, and SoftBank.


David Chao, Invesco

Analysts expect global markets – particularly US equities – to continue their rise, as indices that track US markets have reached another round of records. The S&P 500 Index for example broke its 34th record of the year last week, closing at 4,297.50 on June 30.

The US stock market will end the year marginally up under economic recovery, and investors will rotate from growth to cyclicals, noted David Chao, global market strategist for Apac ex-Japan at Invesco.

Chao expected the rise in inflation to be mostly transitory and believed it will moderate next year to pre-crisis levels. “I don’t foresee the rise in inflation this year to induce aggressive action such as a hike in interest rates from major central banks,” he told AsianInvestor.

Transient inflation should be expected early in an economic cycle, which is a sign of healthy recovery and could have little lasting impact on equity performance, he said.

Simon Weston,

“For the rest of the year - given my expectation of a strong economic recovery with inflation to be temporary, I expect investors to be rewarded for taking on more risk, and so I favour equities over fixed income. Within equities I favour cyclicals over growth, and industrials, materials, and financials over defensives,” he said.

“In terms of regions, I favour Europe and emerging markets, which I believe should be helped by expectations of improving economic growth as well as a weaker dollar.”

However, should the inflation spike turn out not to be transitory but persistent, investors are likely to see a drop in equity markets globally as the US may raise rates sooner, noted Simon Weston, head of Framlington Asia with AXA Investment Managers.

“In such a situation value may outperform growth (segments of value benefit from higher rates, especially banks), but it would likely be relative (ie: value may not decline as much as growth) as expectations for economic growth would probably have to be scaled back,” Weston told AsianInvestor.

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