Japan's Government Pension Investment Fund is able to respond tactically to current market volatility but a broader response built on allocations to infrastructure, real estate and private equity will require a continued expansion of the fund's investment team at home and abroad, the president of the ¥132.1 trillion ($1.3 trillion) Tokyo-based pension giant said.
In a Jan. 16 interview in Hong Kong, Norihiro Takahashi, the former banker who took the helm at GPIF last March, said even with the addition of 30 professionals over the past year or two, and at 100 employees now “we still don't have enough people … to do what we need to do” when it comes to investing in those alternative segments.
Speaking at a “dialogue session” earlier that day at Hong Kong's annual Asian Financial Forum, Mr. Takahashi noted that, with the exception of an internally managed passive domestic bond allocation, the laws covering GPIF force it to rely on external managers for all other investments.
To deal effectively with alternative managers, the GPIF needs to add “people with experience” both at home and — at some point in the future — abroad, as having to fly out from Japan is “not a healthy way to pursue that kind of global investment,” he said in the interview.
If the scale of the organization needs to be broadened further, its culture is already very solid, said Mr. Takahashi. He cited a willingness to express different opinions and debate the merits of investment ideas, which he called unusual in a Japanese culture that tends toward the hierarchical.
Global market volatility, meanwhile, has left GPIF open to criticism over the past year or more, as the fund's returns have been whipsawed since it more than doubled its equity allocation target to 50% — split evenly between domestic and overseas stocks — in October 2014.
With the multiyear market rally that followed the global financial crisis tapering off in 2015, the fund reported investment losses of 5.6% for the quarter ended Sept. 30, 2015; 3.5% for the quarter ended March 31, 2016; and 3.9% for the quarter ended June 30, 2016.
For the quarter ended Dec. 31, however, the fund could be poised to announce record gains, fueled by rallies for global stocks and the dollar inspired by U.S. President Donald Trump's promised pro-growth policies. A GPIF spokesman declined to comment ahead of the late February announcement of results for the Dec. 31 quarter.
In the interview, Mr. Takahashi said despite the GPIF's huge size, it has the capacity to respond tactically to opportunities offered by heightened volatility to pick up assets at lower prices.
For example, while a number of factors contributed to the portfolio's cash holdings rising to a record 8.75% as of Sept. 30 from 5.51% three months before, Mr. Takahashi said his investment team's conclusion that most risk assets looked fully valued or overvalued was one factor. Some of that cash buildup, as the fund's holdings of Japanese government bonds mature, has been reinvested in other assets, he added.
Meanwhile, on the topic of Mr. Trump's likely impact on markets, Mr. Takahashi said higher infrastructure spending, big tax cuts and repatriation of money held overseas by U.S. corporations to invest at home could all boost U.S. growth. Still, he said GPIF will likely raise its exposure to U.S. assets only modestly until evidence emerges in a year or more of underlying improvements, such as rising productivity.
It's tough for GPIF to address volatility more fundamentally in the short term, said Mr. Takahashi. Over the longer term, adding material allocations to infrastructure and real estate should lower volatility and improve earnings, but it will take time to push the portfolio in that direction, he said.
The targets the GPIF adopted in late 2014 added a 5% weighting for alternatives, to be counted — depending on the characteristics of the investment — toward the fund's major asset class weightings of 35% for domestic bonds, 25% apiece for domestic and overseas stocks, and 15% for overseas bonds.
Over the past year, the fund's actual allocations to alternatives have remained minimal, accounting — at roughly ¥80 billion — for less than 10 basis points of the portfolio.
In the interview, Mr. Takahashi said he's working to speed up those investments.
He predicted 5% won't be a permanent ceiling, as that kind of scale won't move the needle for GPIF's broader portfolio, regardless of how successful its investments are. Once GPIF is fully staffed to pursue those investments, though, and begins nearing that target, the investment team can go back to the government and negotiate to raise the ceiling, perhaps to 10%, he said.
Speaking at the Asian Financial Forum, meanwhile, Mr. Takahashi said GPIF is combing now through 27 ESG-related indexes for Japanese stocks that index providers submitted in response to a request for proposals the fund issued last August.
He said GPIF executives are hoping to begin shifting passive allocations to the selected indexes by the spring, but will only announce which indexes it chose this summer.