The seventh annual Institutional Excellence Awards encompassed one of the most challenging periods for investment in living memory.
Standout asset owners during this period have had to be nimble and responsive as conditions sharply deteriorated in late February and March, only to offer investment opportunities in fits and starts from April even as the global economic environment continued to struggle and a US presidential election reached its crescendo.
When choosing the winners of these awards, AsianInvestor and our select panel of expert industry judges took into account the ability of the region's institutional investors to adapt themselves to these unique challenges, in addition to their ability to maintain superior levels of strategic investment planning, maintaining and improving internal resources and personnel and preparing for the obstacles of the future. The winners were the institutions that could best demonstrate how they met these needs.
For our next set of market award winners, we describe how Japan's Government Pension Investment Fund continues to set the pace across pension investors in the country, and how Korea's Public Officials Benefit Association remains a small but forward-looking investment planner.
Government Pension Investment Fund
The world’s largest pension fund remains in many ways Japan’s most progressive investor. It is certainly among the world’s the most influential.
The Government Pension Investment Fund (GPIF) saw a change of leadership early in the year, when assertive ESG advocate Hiromichi Mizuno left upon the end of his extended term. There was some fear that his successor, Eiji Ueda, would not have the same focus on aggressively pursuing sustainability, but thus far he has been proven to be just as dedicated to the concepts of embedded sustainable investing into the heart of GPIF’s investing processes.
In April, immediately upon Ueda’s appointment, GPIF revised its investment principles to emphasise ESG and stewardship responsibilities across all asset classes. This includes a desire to promote initiatives of investee companies that promote long-term, sustainable goals.
Then in August the pension fund released its latest ESG Report for the 2019/2020 financial year, in which it expanded information on itself and recommended that the Taskforce of Financial Climate Disclosure guidelines include a comprehensive assessment of climate change-related risks and opportunities across all the asset classes in its portfolio.
The surge of Covid-19 in the early months of 2020 meant GPIF had a dreadful end to its financial year, which ended on March 31. It recorded a loss of ¥8.28 trillion for the year, or a 5.2% negative return. Yet it bounced back impressively since, notching up ¥17.4 trillion of investment returns – an 11.59% rate of return – between April and September.
GPIF has some big ambitions as it seeks to diversify its enormous ¥157.54 trillion ($1.52 trillion) investment portfolio. Its medium-term goal is to raise its alternative asset investments to up 5% of AUM, and indeed it appointed managers for a new private equity mandate in April and has added staff to its private investment department.
However, there is still a lot of work to do. GPIF had an alternatives asset position of a little over 0.5% in September, meaning it needs to add around $66 billion in the coming few years to hit this target.
Public Officials Benefit Association
One of Korea’s most trailblazing pension funds is also one of its smaller members. The Public Officials Benefit Association (Poba) has proven willing to be the first asset owner from the country to experiment in investment areas, only to be followed by its larger brethren once it has demonstrated success.
The pension fund has done this by focusing on diversifying its portfolio with its steadily expanding inflow of member contributions, while also allying with international pension funds and institutional investors to better identify other areas of potential investment, particularly in the alternative asset areas. These included it agreeing with California State Teachers’ Retirement System (Calstrs) to set up a $312.5 million joint venture (JV) to invest into US multifamily residential real estate on January 16, 2020.
Poba has long recognised that alternative assets are absolutely core to its long-term ability to generate enough returns and meet its annual investment return target of around 5%. Some of these have proven very lucrative, including a portfolio of small to medium office buildings in Germany that Poba invested into, which netted it internal rate of return in the mid-teens at the end of 2019, following a five-year investment period.
The fund has built up a position of over 55% in alternative assets. And, to improve its internal expertise, it sends two employees to take six months of alternative investment training overseas every year.
Poba has continued expanding its asset array. and recently made a commitment to a separately managed account for US public real estate investment trusts and global public infrastructure investment which led to that internal decision to sell-off the asset
It has also gone about assessing its risk management processes and changed some of them. One example was a re-evaluation of its contingency planning. It also established more robust metrics for liquidity risk to help ensure that it enjoys appropriate amounts of liquidity within the fund. And it has used an external consultant to help redefine its asset class categories – something planned for 2021.
A perennial favourite of asset managers and advisers, GIC is typically described as one of the most sophisticated global institutional investors, and one that is constantly seeking to push the boundaries of investing.
GIC had been adapting its portfolio over concerns about overly high liquid asset valuations in 2019. Along with fears that market liquidity disappears during crises, the fund opted to raise cash and bond investments from 39% as of March 2019 to 44% a year later, while cutting from 19% to 15%.
Those shifts that helped cushion it once the Covid-19 volatility emerged in March.
It has subsequently become extremely active, particularly when it comes to direct or alternative asset investments. Barely two weeks go by without GIC being mentioned as a participant in various consortiums buying companies or taking strategic stakes in others. And these are not always for major transactions. Indeed, according to data from the Global Sovereign Wealth Fund Institute, GIC was one of the two most active deal makers for venture capital deals in 2020 as of November, as it sought to take advantage of shifting markets conditions.
Other standouts include the sovereign wealth fund looking to set up an India-focused public market investment fund of up to $3 billion in 2021. GIC has been happy to help other firms consolidate too, investing $202 million into a private placement by Toronto-listed engineering firm WSP Global as it raised funds to take over a rival.
The combination of risk assessment and direct investing helped GIC announce that it made nominal results of 4.6% for the 20 years to March 31, or 2.7% above inflation (it does not break out annual performance figures).
It has also become notably more actively assertive around ESG, after a few years of remaining relatively low-key in the fast-expanding field. The Singaporean fund announced on November 30 it had become a member of the Asia Investor Group on Climate Change, plus it also signed up to CDP and was the first sovereign fund to sign up to Climate Action 100+, the largest global initiative on climate.
These steps were all taken as part of GIC’s strategy to raise its engagement on climate risks and investment possibilities. After a period of assessment, the sovereign fund has evidently decided there is enough data to merit more active involvement. On December 15 it reportedly invested $200 million in a geothermal heating company backed by China’s largest oil refiner, Sinopec.