Japan’s Government Pension Investment Fund, the largest pension fund in the world, has established a set of investment principles that focus on its ability to take advantage of its long-term investment horizon and the fund’s ability to make pension payments.
The ¥137 trillion ($1.1 trillion) fund is working to long time horizons, with a fiscal plan drawn up such that the reserve assets of the GPIF will be used to fund benefits and achieve fiscal equilibrium within about 100 years. According to financial projections it will be about 25 years before reserve assets will start to decline.
These long time horizons are seen as an advantage, and while the principles acknowledge market prices may fluctuate in the short term, the fund aims to achieve more stable and efficient returns by taking full advantage of its long time horizon.
The fund’s overarching goal is to achieve the investment returns required for the public pension system, with minimal risks, solely for the benefit of pension recipients from a long-term perspective, thereby contributing to the stability of the system. A failure to achieve the investment returns required for the pension system is believed to be the fund’s biggest risk.
When investing for the long term GPIF believes it is better to set and maintain the policy mix over a long period, rather than frequently changing asset allocation to short term movements.
Diversification is the fund’s primary investment strategy, and it believes in both passive and active implementation.
The GPIF approved a new asset allocation in October last year, which will have the impact of moving around 30 per cent of assets from domestic bonds and short term assets, appointing four new equities managers.
The target for domestic bonds shift from 60 to 35 per cent, domestic equities increase from 12 to 25 per cent, international bonds increase from 11 to 15 per cent and international equities shift from 12 to 25 per cent. The allocation to short-term assets will be reduced from 5 to 0 per cent, with short-term assets incorporated into the other four asset classes.
The fourth principle centres around stewardship and is aimed at increasing medium to long term investment returns by promoting enterprise value enhancements and sustainable growth is appropriate for the features of the pension reserve.
As with all investment principles, these will guide the strategy and implementation of the fund.
The fours investment principles:
- Our overarching goal should be to achieve the investment returns required for the public pension system with minimal risks, solely for the benefit of pension recipients from a long-term perspective, thereby contributing to the stability of the system.
- Our primary investment strategy should be diversification Our primary investment strategy should be diversification by asset class, region, and timeframe. While acknowledging fluctuations of market prices in the short term, we shall achieve investment returns in a more stable and efficient manner by taking full advantage of our long-term investment horizon. At the same time we shall secure sufficient liquidity to pay pension benefits
- We formulate the policy asset mix and manage and control risks at the levels of the overall asset portfolio, each asset class, and each investment manager. We employ both passive and active investments to attain benchmark returns set for each asset class, while seeking untapped profitable investment opportunities.
- By fulfilling our stewardship responsibilities, we shall continue to maximize medium- to long-term equity investment returns for the benefit of pension recipients.