With the global market environment becoming more sophisticated and ... take into account the results of its investment a
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Japan’s pensions approach Alternative assets to diversify portfolio Norihiro Takahashi, Government Pension Investment Fund The Government Pension Investment Fund has a new policy asset mix, allowing up to 5% of the portfolio to be invested in alternative assets including infrastructure, private equity and real estate, while recognising the importance of robust risk management.
The legal framework regulating GPIF’s investments is changing to allow greater flexibility in managing the fund.
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he mandate of the Government Pension Investment Fund is to contribute to the stability of the Employees’ Pension Insurance and National Pension Schemes by managing and investing the reserve funds entrusted by the minister of health, labour and welfare. Discharging this mandate requires safe and efficient management of the fund over the long term for the sole interest of the pension beneficiaries. With the global market environment becoming more sophisticated and complicated, and as Japan pursues policies to overcome years of deflation, GPIF’s approach to investment diversification and risk management has had to be updated. In seeking a more diversified portfolio, GPIF has conducted a series of studies on alternative assets and, based on assessment of the different risk-return profiles compared with more traditional assets, started co-investment in infrastructure in 2014, undertaken with like-minded, experienced institutional investors. GPIF also implemented a new policy on alternative investment under the policy asset mix that allows infrastructure, private equity, real estate and ‘others’ (subject to approval by the Investment Advisory Committee) to be included, up to a maximum of 5% of the fund’s total portfolio. Under relevant regulations, GPIF, a government-owned independent administrative agency, has to take into account the results of its investment actions on financial markets and private sector company management. GPIF should not distort investment behaviour in the private sector and should be aware of the timing of investment and divestment decisions. GPIF is required not to exert undue influence on company management, at the same time as it needs to be mindful of maximising investment returns from a long-term perspective, including through responsible exercising of voting rights. The legal framework regulating GPIF’s investments might be changed to allow greater flexibility in managing the fund. Alternative asset investments are currently organised on a unit trust basis, but the government is discussing possible regulatory amendments to GPIF’s existing framework to include limited partnerships. As GPIF moves further into alternative investments, we are striving to enhance our risk management and other control measures, and continue to build up a dedicated team of experienced personnel. GPIF is taking a careful, steady approach to portfolio diversification and allocation to alternative investments, requiring updated risk-return analyses, compliance with legal and regulatory requirements, new management practices and expertise. Over the long term this new policy stance will keep GPIF up to date with developments in the global economy and allow us to fulfil our mandate of long-term stability, safety and efficiency in managing the reserve funds of the national pension schemes. GPIF investment principles state: ‘By fulfilling our stewardship responsibilities, we shall continue to maximise medium to long-term equity investment returns for the benefit of pension recipients.’ Considering environment, social and governance issues would lead to increased value and sustainable growth of investee companies. For such stewardship responsibilities, GPIF has become a signatory to the United Nation’s Principles for Responsible Investment to express our attitudes to ESG issues. GPIF’s governing law does not permit direct equity investment, but we commit to ESG issues through our external asset managers.
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Norihiro Takahashi is President of the Government Pension Investment Fund.
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