GPIF’s foreign investments save blushes after weak Q1

Sizeable exposure to overseas markets has helped the huge Japanese pension fund stave off a rout after a turbulent period, underlining why others are following suit.
GPIF’s foreign investments save blushes after weak Q1

International portfolio diversification is helping institutional investors, especially Asian ones, find some respite in a harsh investment environment – and proving increasingly important in their allocation strategies.

Take Japan's Government Pension Investment Fund.

Investments in developed markets, particularly US equities, have helped it counter volatility elsewhere, notably falling share prices in various Asian countries.

The world’s largest pension fund on August 2 reported total returns of 0.16% for the April-June first quarter. Not much to write home about, but it could have been worse. Foreign equities returned 1.29% and foreign bonds 0.94%.

“Given the negative interest rates of domestic bonds, overseas bonds would at least provide a higher expected returns compared to domestic bonds,” said an institutional equity trading head at a securities firm in Tokyo. 

Domestic stocks fell 2.31%, while domestic bonds returned 0.81%, according to the GPIF.

The trend was not dissimilar to that in fiscal 2018, when foreign stocks and bonds delivered a 8.12% and 2.7% return respectively, helping the GPIF counter a 5.09% loss on domestic equities.


Source: Japan Government Pension investment Fund, Q1 2019

GPIF isn't alone. At South Korea’s National Pension Service (NPS), which recorded a -0.92% loss in 2018, foreign equities performed better than domestic stocks. This has come after it has been moving to raise its overseas stock market exposure.

But it was alternative assets – as has been the case for many asset owners – that really boosted NPS's performance, with a return of 11.8%.

Similarly, GPIF will be hoping that its moves to build a global alternatives portfolio will help improve returns. After inviting pitches from alternative fund-of-fund managers in 2017, it has issued global mandates for asset classes such as infrastructure and real estate. 

Moreover, Japanese pension schemes generally have been following GPIF in allocating more to offshore assets.

Jason Rich


“It is unsurprising that Asian institutional investors are making further plans to tap into overseas growth,” said Jason Rich, head of sector solutions for Asia Pacific at asset servicing and asset management giant State Street. 

Societies in China, Japan and Korea are ageing fast, with the land of the rising sun home to the of the oldest populations in the world, said Rich. That in turn, is putting enormous pressure on insurers and pension funds to generate the ever-increasing income required for policy payouts, he said. 

It also makes sense to be internationally diversified to help cope with more temporary local challenges.

For instance, while Singapore may not have the immediate problem of a rapidly ageing population, slowing global trade amid a trade spat between the US and China is weighing on the city’s economic growth. Large investors in the Lion City such as Temasek, which has 74% of its assets offshore, benefit from their large overseas exposure at times like this.

“Home market bias is common among investors globally," Rich added. "However, for Asian investment institutions, the need for reliable returns is greater than most.”

Kimon Kouryialas

Kimon Kouryialas, head of distribution for Asia Pacific at Martin Currie Investment Management, made a similar point. "What we are seeing are the benefits of diversification and moving away from home-country bias that is resulting in greater opportunities to seek alpha generation outside of one’s own local boundaries." 

State Street’s Rich added: “We expect this trend to continue as the fundamental drivers – a low-yield environment and ageing populations –are not going away any time soon in Asia."

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