GPIF, ADIA: complex success

Diversification benefits are demonstrated in the returns of two large investors with complex portfolios: the Government Pension Investment Fund (GPIF) of Japan, and the Abu Dhabi Investment Authority (ADIA).

Both have large portfolios but they differ in their history of investing. GPIF is only at the beginning of its journey towards diversifying its holdings, while ADIA has a long history of investing in private equity, real estate, infrastructure, alternatives and equities, across both the capitalisation spectrum and various geographies.

GPIF returned 5.86 per cent for its fiscal year 2016, and has generated an annual rate of return of 2.89 per cent since inception. The fund, which now has funds under management of ¥144.9 trillion ($1.3 trillion), attributed its annual return to the positive impact of domestic and international equities.

For the year to the end of March 2017 (GPIF’s latest fiscal year) its domestic equities portfolio returned 14.89 per cent, foreign equities returned 14.2 per cent, and domestic bonds returned -0.85 per cent.

Historically, the fund has had a simple, conservative asset allocation, including a large holding in bonds, particularly domestic bonds. It is only now starting to diversify into equities, and holds no private or alternative assets. Over the last two years, it has decreased its allocation to domestic bonds by 10 per cent, re-allocating to domestic and international equities, which together now make up nearly half of the portfolio.

GPIF has made the unique statement that its investment horizon is 100 years; however, it allows its external managers to determine the holding period of their investments.

Meanwhile, the Abu Dhabi Investment Authority has a much more diversified portfolio. It has generated a return of 6.9 per cent a year over the 30 years to the end of December 2016. The 30-year return was 7.5 per cent at the end of 2015.

ADIA’s long-term policy portfolio asset allocation is developed equities (32-42 per cent), emerging market equities (10-20 per cent), small-cap equities (1-5 per cent), government bonds (10-20 per cent), credit (5-10 per cent), alternatives including hedge funds and managed futures (5-10 per cent), real estate (5-10 per cent), private equity (2-8 per cent), infrastructure (1-5 per cent) and cash (0-10 per cent).

In 2016, ADIA got positive results from its decision to expand its investment universe within the alternatives portfolio, allowing co-investments alongside managers in special situations, along with investments in smaller, capacity-constrained managers.

It also launched an emerging opportunities mandate to invest in asset types that fall outside the remit of ADIA’s other investment departments. It is expected to execute its first such investment this year, with a view to adding differentiated return streams and diversification to the total portfolio.

GPIF’s assets are all managed by external managers, whereas about 60 per cent of ADIA’s assets are managed externally.