General review of FY2020

Asset management for Japan’s GPIF in FY2020 (April 2020 - March 2021) produced an increase of JPY 37.8 trillion compared with the previous fiscal year, a gain of 25.15%.  Assets under management (AUM) at the end of March 2021 totaled JPY 186.2 trillion, with an accumulated return of JPY 95.3 trillion.

Source: GPIF

FY2019 ended with a JPY 8.4 trillion decrease in AUM and a -5.2% return, the first negative return since FY 2015.  GPIF’s returns in FY2020 more than compensated for the previous year’s negative results.  Needless to say, the historic rise in domestic and international stock markets has been the driving force behind the phenomenal returns.

Such results would have been unimaginable in late February 2020, as COVID-19 surged in Europe and the U.S., raising concerns for the global economy that fueled a precipitous decline in global stock prices.  In the last week of February alone, the U.S. stock market, which had previously been at an all-time high, experienced its sharpest decline, more than 10%, since the global financial crisis of 2008.

By late February, GPIF reversed all gains from the first three fiscal quarters and fell into negative territory.  FY 2020 started from the bottom, but thanks to the unprecedented large-scale fiscal stimulus and monetary easing by governments and central banks, stock markets rebounded sharply and rapidly, and GPIF achieved its highest-ever positive return.

Source: GPIF

Difference with corporate pension funds

How does GPIF’s performance compare with other pension funds in Japan?

According to “The Estimated Investment Yield of Japanese Pension Funds, FY2020” by Willis Towers Watson, the average investment return for Japanese corporate pension funds was 11.4%.  While such returns were extraordinary, GPIF’s return was more than double the average.  The difference comes down to the percentage of stocks in the portfolio mix.

GPIF's basic portfolio is based on an allocation of 25% to each of the "four traditional assets" of domestic and foreign bonds and stocks, and the actual asset allocation is almost exactly the same as the basic portfolio.  In other words, they have allocated as much as 50% of their total assets to domestic and foreign equities, and as a result, they have been able to fully enjoy the benefits of the ultra-easy post-Corona market, known as the "rational bubble”.

Source: GPIF

Meanwhile, the average ratio of equity holdings among corporate pension funds has decreased each year in the 10 years since the global financial crisis, and is now said to be around 20% in domestic and foreign combined. (Pension Fund Association “Result of Corporate Pension Survey FY2019 (Summary)”)  Given the relatively high volatility of listed stocks, pension funds have sought to raise income earnings by adopting various bond and credit strategies and investing in private assets such as real estate, infrastructure, and private debt. The trend in corporate pension fund management is to aim for long-term stable investment while minimizing short-term downside risk.

It is no surprise that investors with a 50 percent equity allocation in their portfolios would see very different results from those with a 20 percent allocation.  The investment results of public and private pensions (corporate pensions) in 2020 clearly showed the difference between the positive returns of the stock market and the opposite results if the stock market were to post negative returns.  In FY2019, which was damaged by the COVID-19 pandemic, GPIF’s investments returned -5.2%, as mentioned earlier, while the average performance of corporate pension plans was only minus 1.1%, according to a study by Willis Towers Watson.

Steady growth in ESG investment

Hearing that GPIF gained JPY 37.8 trillion in only a year or lost JPY 17.7 trillion in only 3 months may cause some Japanese pension participants to wonder about the safety of investing in stocks.  As reported in its results for 3Q 2020 (https://investmentjapan.jp/japans-basic/2667/), GPIF is positioned as an "ultra-long term investor looking 100 years ahead”.

With the ultra-long term investment horizon that only a public pension can provide, and as a universal owner (a large-scale asset owner with a wide range of assets) not distracted by short-term fads and market fluctuations, GPIF aims to minimize the negative effects of environmental and social issues, so-called "negative externalities," and enjoy sustainable growth by "improving" the markets and society as a whole.

It’s an investment approach and philosophy best represented by ESG investment.  Of the approximately JPY 95 trillion in domestic and foreign stock portfolios, 93% of domestic stocks and 88% of foreign stocks are passively managed in conjunction with indices.  Of course, as the world's largest universal owner, GPIF has no choice but to make investments that take into account market impact.  So it is natural to allocate a large portion of its assets to passive management.  However, passive does not mean buying the entire market and standing idly by.

GPIF builds portfolios by adopting several ESG indices that overweight companies with high ESG ratings in addition to their market capitalization.  GPIF also expressed support for the Task Force on Climate-related Financial Disclosure (TCFD) recommendations in 2018 and disclosed its efforts related to the risks and opportunities of climate change based on the TCFD recommendations.  GPIF continues to augment its presence as one of the world's leading ESG investors in terms of investment behavior and disclosure.  More information and details about GPIF’s engagement with ESG will appear later this summer in “GPIF ESG Report FY2020”.

Source: GPIF

< Masayoshi Koike >