The pension fund in December launched a search for outside managers to run the undetermined emerging markets allocation. Fund officials expected the search process to take a year, but because of the ¥2.5 trillion outlay to the emergency reconstruction budget, the process could be expedited, sources said.
Asset allocations of Japan's public plans vary greatly from those of corporate plans in Japan, said Hidenori Suzuki, head of strategic investment advisory group Japan for J.P. Morgan Asset Management.
According to a recent JPMAM survey, Japanese corporate pension plans increased their allocations to emerging market equities and alternatives in fiscal year 2011, which ended March 31, while reducing allocations to domestic equities and international and domestic bonds. Currently, 54.6% of Japanese corporate plans are invested in emerging markets equity and 21% in emerging markets debt, while 79% are invested in absolute return. A report on the survey noted that more than 50% of respondents include emerging markets equities as part of international equities. Japanese pension funds are also increasing new absolute-return mandates by four percentage points to 18.1%.
“Japanese public pensions are basically very risk-averse on their portfolio management,” Mr. Suzuki wrote in an e-mail.
The large exposure by Japan's public plans to Japanese government bonds is the reason their long-term returns are less than 2%, quite similar to the long-term government bond yield, Koichiro Obu, head of research for RREEF, Deutsche Bank Group's real estate investment unit, wrote in an e-mail.
The GPIF's total return for 2010 was -0.91%. The rate of return for the quarter ended Dec. 31 was 0.62%, down from 1.53% in the prior quarter and lower than the 1.47% return in the last quarter of 2009.
By comparison, the $240.5 billion California Public Employees' Retirement System, Sacramento, reported a 12.5% net return on investments for calendar year 2010.
The GPIF's two top-performing asset classes in the quarter were domestic stocks at 8.71% and international stocks at 5.55%, which either matched or slightly outperformed their benchmarks.
Kotaro Tamura, former Japanese senator and parliamentary secretary for economic and fiscal policy, said in an interview that he expects the earthquake and tsunami to result in increased allocations to alternative and non-domestic strategies in order to boost returns. The GPIF will have to expand into other asset classes to get more yield because it needs the capital to pay retirees, Mr. Tamura said. “The impact (of changing the asset mix) is big,” he said.
When he was in the Japanese government, he said he helped set up the GPIF, which he calls a sovereign wealth fund.
However, opinions vary as to how quickly the government pension fund will move in this direction.
J.P. Morgan's Mr. Suzuki doesn't think the fund will change its policy mix dramatically by increasing its allocation to international assets or by introducing alternative investments. He said the fund is most likely to include emerging markets as part of its allocation to international equities. “It is true that they have some working group to study alternative investments,” he said, adding that the group is in the ” information-gathering stage.”
The GPIF won't change its asset allocation immediately in part because guidelines require government committee approval, and that happens only once every five years, RREEF's Mr. Obu stated.
“The Japanese government also has a strong intention to maintain the stability of their sovereign bonds, so selling off of government bonds by GPIF is the last thing they want to happen,” Mr. Obu said. “This is why we think they will not change the investment policy in a short time. I think they should consider employing a more modern approach as the investment world continues to change, but it will take a lot of time before they change the investment policy.”