Japan’s Government Pension Investment Fund (GPIF) has made its first foray into alternatives in a move likely to spur copycat investment into the sector by the nation’s pension industry.

The $1.3 trillion fund has entered into a co-investment agreement with the Development Bank of Japan (DBJ) and Ontario Municipal Employees Retirement System (Omers) to jointly invest in infrastructure assets. This includes power generation, electricity transmission, gas pipelines and railways in developed countries.

GPIF says its co-investment partners have extensive experience in infrastructure investment, adding that Omers achieved an 11% annualised rate of return through infrastructure investment between 2009 and 2013.

The infrastructure assets will be sourced by Omers, with DBJ and GPIF gaining exposure via a unit trust managed by Nissay Asset Management, which will make the investment decisions. Mercer Investments will act as adviser to Nissay.

Infrastructure is one of the most valuable investments for overseas pension funds, GPIF notes.

The fund will invest as appropriate opportunities are identified over a five-year investment period. The aggregate outstanding investment may reach ¥280 billion ($2.7 billion), accounting for 0.2% of GPIF’s total assets under management.

Infrastructure is classified as international fixed income  in GPIF’s policy asset mix and will be managed as part of GPIF’s in-house investment.

GPIF says it expects to garner its co-investors’ expertise to strengthen its own investment and risk management capabilities.

Tokihiko Shimizu, director-general of GPIF’s research department, is responsible for alternative investment. In an indepth interview last year he told AsianInvestor: “We are at a stage where we are facing negative cash flow because of Japan’s ageing society.

“Total benefits are more than the total amount of contributions, so we have to sell a substantial portion of our assets to give to the scheme. In general cash inflow from domestic bonds is nominal, it is not tracked to inflation. We would look at private assets to capture inflation-linked cash inflow.”

He added that it was difficult for institutional investors to achieve alpha above the benchmark index in an advanced country due to the efficiency of the stock market, so it had to consider expanding into private equity and alternative investment.

GPIF is understood to have looked at two types of exposure to alternatives: funds of funds and co-investment. It has decided on the latter for infrastructure.

It has conducted a series of studies on alternative assets as it seeks to capture illiquidity premium and to benefit from diversification.

It completed its asset allocation review last year, having reduced exposure to fixed income from 67% to 60%, increased domestic stock allocation from 11% to 12%, and raised exposure to international bonds from 8% to 11% and to international stocks from 9% to 12%.

As at the end of last year GPIF had ¥129 trillion ($1.27 trillion) in assets under management.