Japan's Government Pension Investment Fund may be mulling changes to an alternatives investment program that's been cautiously deliberate until now.
On April 20, the ¥177.7 trillion ($1.63 trillion) Tokyo-based giant made two separate announcements speaking to potential changes: the first was a callout for information from managers of domestic real estate, a sign GPIF could be moving beyond the fund-of-funds platforms it's focused on in recent years to directly hire general partners; the second was a paper exploring ways to accelerate allocations via means such as private equity replication strategies.
A Nomura Research Institute paper, "Alternative Asset Replication Using Exchange-Traded Assets," commissioned by GPIF and posted on the fund's website, concluded that a portfolio of exchange- traded assets is capable of tracking the long-term performance of private equity benchmark indexes. Such strategies would open the door for institutional investors to "rapidly scale up exposure without worrying about illiquidity," the Nomura report said.
An overview of alternatives investing GPIF posted on its website on March 26 showed infrastructure accounting for the bulk of the fund's ¥944.5 billion of allocations as of March 31, 2020, at ¥545.1 billion, followed by ¥380.8 billion in real estate and only ¥18.5 billion — or less than 2% — in private equity.
A more aggressive push into alternatives would mark a departure for GPIF. Since issuing its first alternatives-focused RFP in early 2017 for managers of infrastructure, real estate and private equity fund-of-funds strategies, GPIF has moved deliberately and — for its size — incrementally, allocating $2 billion to $3 billion a year to alternatives.
The pension fund's latest report for the quarter ended Dec. 31 showed roughly $11 billion parked in alternative strategies — two-thirds of 1 percentage point of the GPIF portfolio.
The fund's 5% ceiling on alternatives exposures gives GPIF room to allocate another $70 billion to those strategies.
The bull market in equities over the past 12 years — powered by the extraordinary monetary and fiscal policy steps taken to combat the global financial crisis and the coronavirus pandemic — has buoyed GPIF's returns, particularly since late 2014 after a more than doubling of the fund's global equities allocation target to 50% of its portfolio.
While that rally — which could remain well supported this year by a flood of U.S. fiscal spending — may be making the diversification benefits offered by alternative allocations less of an immediate priority, the outlook is murkier on a two- or three-year view.
A GPIF spokeswoman said top GPIF executives were not available to discuss whether they're feeling any pressure now to lessen the fund's reliance on equity market beta.