Lessons GPIF can learn from its $136b record loss

The Japanese asset owner registered its largest investment loss in the final three months of 2018. That could prompt the fund to consider greater diversification as it reviews its portfolio.
Lessons GPIF can learn from its $136b record loss

Suffering an investment loss greater than the GDP of Ukraine within three months would be enough to get most investment teams fired.

Pity, then, the Government Pension Investment Fund (GPIF) official tasked with informing Japan’s Ministry of Health, Labour and Welfare that the pension fund giant had recorded a $136 billion loss in the final three months of 2018.

The pension fund was clobbered by a combination of factors, including concerns over both the US and Chinese economies. Speaking at a third-quarter results announcement on February 2, GPIF president, Norihiro Takahashi, noted (in Japanese; the following is a translation) that local and global stocks had tumbled between October and December “because investors avoided risks caused by the concern for the global economy and the alleged decline of company revenue”.

Added to this investors poured into safe-haven assets such as US Treasuries or the Japanese yen. “Interest rate [yields on bonds] were decreased mainly on the US, and the yen rose against major currencies,” which also hurt results, Takahashi said. 

GPIF was also a victim of its own size and scepticism about active fund management. The pension fund invests about 80% of its now ¥150.66 trillion ($1.37 trillion) in assets via passive investments that track equity and bond indices up and down.

The emphasis on passive investing is largely down to chief investment officer Hiromichi Mizuno, who believes that active fund managers don’t offer any real alpha over the long term. It’s a view supported by the pension fund’s analysis of its own 10-year active fund performance to March 2016.

By focusing on passive investing, GPIF has saved itself a lot of fund management fees. But it also meant it could only watch as the value of its 50% allocation to domestic and international stocks lost their value in the final stages of 2018, causing its portfolio to diminish.


GPIF was far from being the only asset owner to experience losses at the latter end of 2018. National Pension Service, Korea’s top pension fund, reported a loss of over W16 trillion ($14.34 billion) during October; it has yet to reveal investment returns for the last two months of the year.

The question for many asset owners is whether the painful experience of 2018 holds any lessons that they can learn from.

A fund the size of GPIF and with such a commitment to very long-term investments and a deep-seated scepticism about the value of traditional active managers appears unlikely to change its thinking soon. A spokeswoman for GPIF noted that the pension fund constructed an official Policy Asset Mix, which has an alleged management period of 25 years.

But GPIF is also in the midst of reviewing its investment strategy.

“Our Board of the Governors has a project team that has started the preparation for the next portfolio review since last September, as new medium-term objectives will be installed from 2020,” the spokeswoman told AsianInvestor.

She noted that the review was already scheduled – the 2019 fiscal year ending in March 2020 is the last year of GPIF’s current medium-term objectives. However, the experience of 2018 could hold some interesting lessons for the pension fund giant as it makes its investment plans.


One possible consideration could be whether GPIF needs to more aggressively hedge its foreign exchange risk (something Takahashi addressed in November, when he noted that GPIF was indeed looking to conduct more hedging.

Another could be the need to raise alternative asset investing more rapidly. A senior member of the fund’s investment team indicated to AsianInvestor in December that GPIF could raise its allocation to alternatives from 0.2% to about 3% of its AUM in the coming three years. So it will be interesting to see whether it maintains or accelerates these plans.

Infrastructure would be another welcome arena for the long-term investor’s ample capital; Asia’s infrastructure funding needs are well known, and institutions such as Asian Infrastructure Investment Bank have been keen to partner with asset owners to support projects.

Another possible diversification option for GPIF and other asset owners would be to invest more heavily in emerging market assets. Of course, it’s a high-risk step that could have proven even more painful last year ­– the MSCI Emerging Markets Index was among the world’s worst performers, shedding 14.57 %.

There is also GPIF’s rising interest in environmental, social and governance. As the head of research at a data provider commented to AsianInvestor, the pension fund is looking to refine its ESG investment policy, an area in which it is already heavily committed when it comes to picking fund managers that act on its behalf.

Changes to its policy might lead it to alter how it asks fund houses to invest. And putting some of its money to work in impact investing funds might offer it another investing avenue.  

Ultimately only so many diversification options are available for the world’s largest pension fund. But adopting a variety of them may help GPIF limit any future quarterly shocks to a little less than the equivalent economic output of a relatively large eastern European nation.

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