In today’s volatile and challenging markets, University of Texas Investment Management Co (UTIMCO), the $81.5 billion asset manager and one of the largest public endowments in the US, will maintain its counter-cyclical approach by rebalancing every month and going overweight in equity as it sees the market drop.

Following a predetermined set of thresholds, the investor is happier to be overweight because it is easier to tell when the market is cheap and buy in, than it is to judge if the market is expensive, and be underweight.

“We will go overweight when we can, buying assets cheaply and ride that up: we rarely go underweight,” said president, CEO and chief investment officer Rich Hall in a recent board meeting at the fund’s Austin headquarters.

During the meeting, Hall also outlined his key concerns regarding the impact of policy shifts by the US administration on projected corporate earnings for 2025, describing a negative shift in earnings expectations due to lower growth, higher inflation and little added relief from the Federal Reserve.

Consensus numbers for the S&P 500 year-on-year earnings per share (EPS) growth estimates were as high as 15 per cent at the end of 2024, and it looked like the S&P would end the year at 6500 points. Key metrics signposted a constructive or neutral outlook for companies, and investors believed that the new administration would implement pro-business policies.

However, the market missed the magnitude of the impact of tariffs on trade and the economy. These numbers fell “off a cliff” in January this year, and are now as low as 9 per cent. Although Hall acknowledged that [9 per cent] is still growth, it is “not what it was,” and comes with higher levels of risk given enduring policy uncertainty.

Recessions happen when people ‘wait and see’

“There is a saying that recessions happen when people wait and see. The policy and economic uncertainty is causing consumers and companies to pull back on spending until they see what is going to happen,” he warned, adding that the probability of a recession increases as spending slows, and that a recession can become self-fulfilling until new facts emerge to break the pattern.

Moreover, he noted that despite the sharp fall in the equity market in April, the S&P 500 is still at elevated levels relative to the last ten years. This is a cause for concern for investors given the uncertainty that is still in the economy, and the fact that the higher the level, the bigger the potential fall.

During the last 12 recessions since World War 2, the median market fall in the S&P 500 has been 24 per cent and the median EPS fall has been 11 per cent. Modelling these averages to current levels if recession strikes suggests an S&P valuation of 4500, triggered by a decline in earnings and a compression in valuation multiples.

Getting stuck in the mud with stagflation

Hall also flagged his concerns regarding stagflation – one of the most difficult environments for asset values – given the fall in GDP growth and the rise in inflation.

“You can get stuck in the mud and that’s not a great place to be.” He noted that inflation expectations have spiked higher across the board and it remains to be seen to what extent tariffs will push it higher still. Meanwhile, inflation uncertainty has slowed the pace of rate cuts by the Fed, with the idea that any cuts will come later, not sooner.

Despite the high levels of volatility in the last 12 months, UTIMCO’s portfolio has earned 8.6 per cent, exceeding its benchmark by over 2 per cent, and the asset base has grown to $81.5 billion.

The endowment has 26.2 per cent in public equity, 27.8 per cent in private equity and 6.4 per cent in directional hedge funds. It has a 5 per cent allocation to long treasuries, 2.3 per cent in cash and 10.8 per cent in stable value, plus a 2.8 per cent allocation to natural resources, 4.8 per cent infrastructure, and 8.8 per cent real estate. Five per cent is allocated to strategic partnerships.

Investors are weighing up the implications of a multi-regime change that is manifesting in new rules governing global trade and tariff uncertainty, shifting geopolitics and security and defence partnerships, and a steady rise in real interest rates.

“There are many balls up in the air and we have to work out what matters and if we have to change strategy as a result,” CalPERS’ chief investment officer Stephen Gilmore said during the $527 billion pension fund’s quarterly CIO report in June.

But despite warning of change ahead, Gilmore also urged the CalPERS board to view market behaviour through a long-term lens.

Despite this year’s turbulence, equity markets are now close to where they were at the beginning of the year – although the US dollar is notably weaker.  Other reassuring signs include the fact that the pension fund has returned 5.6 per cent for the fiscal year to date and is on track to meeting or exceeding its discount rate driven by listed and private equity.

Gilmore also noted that CalPERS’ allocation to private assets has gone up 3 per cent since he last reported to the board.

Putting recent events in context, he said that ever since 2000, US industrial production “has flatlined,” even though GDP has continued to grow. He noted that efforts to introduce tariffs to counter America’s longstanding and generous trade deals with other countries are nothing new, and said that the US has also run a persistent trade deficit and spent more on defence than its partners for years.

The US equity markets is still – and has been ever since the GFC – a standout performer relative to European and Japanese markets, although other global markets have finally broken out of their long-term, lethargic range. He noted US valuations are still quite high and flagged that this is in keeping with the view that returns will be lower ahead.

“We would expect forward looking returns in the US to be lower than they are for other equities.”

Gilmore also noted that although the US dollar has weakened in the last few months, over time the currency has been very strong and remains so.

He also noted that interest rates, which have driven market outcomes in recent decades, look higher ahead. Interest rates have risen ever since 2020 and 5y5y market predictions – referring to the 5-year interest rates in 5 years’ time – signpost that they will continue to rise after inflation.

“From our perspective over the longer run it’s not a bad thing because if the level of interest rates is higher then long-term returns for us should be a bit better.”

Gilmore’s message was echoed by Lauren Rosborough Watt, lead economist for the CalPERS investment office whose presentation to the board outlined how growth is expected to continue to decline over the year, but the increase in inflation may not be as high as feared because oil prices are still lower today than they were at the start of the year.

The impact of President Trump’s “big beautiful bill” on corporate growth is likely to be muted in the short run because tax breaks will have a positive impact on companies. The bill was signed into law on July 4, and the final legislation scrapped the so-called “revenge tax”, which would have imposed higher duties on foreign companies and investors from countries deemed to have “unfair” taxes on US businesses.

Rosborough Watt said that in contrast to media rhetoric, US consumers remain the driver of growth in the economy; AI is benefiting equities, and US asset markets are deep and liquid and the dollar remains the reserve currency for now.

The government may pick up extra revenue from tariffs and importers are compressing margins. The board also heard how demand for labour is slowing, but this is balanced by a reduction in the supply of labour, likely resulting in only a very modest increase in unemployment.

Warning on the deficit

However, Glimore flagged America’s fiscal challenge and said the deficit will stay at elevated levels. It remains to be seen how much additional contribution the budget adds to current debt loads, and he said it is also unclear how much will be collected in tariff revenues to offset debt.

Nevertheless, “a fiscal deficit of 6 per cent of GDP for the foreseeable future gets challenging after a while”, he said.

Running a trade deficit requires inflows of capital to finance it, yet there is a growing discussion around capital flows forcing the trade balance wider. “If you are running a trade deficit you need inflows,” he said.

Rosborough Watt highlighted that the new environment has raised the spectre of uncertainty for investors.

Risk is based on a known set of future outcomes and the probability that those outcomes will fall within a certain range.

Uncertainty introduces unknowns whereby the range of outcomes could be wider. It’s visible in how economists are now pulling back on predictions made a few months ago about recession and inflation, and the changing narrative around tariffs and rates.

Gilmore concluded that the new total portfolio approach (TPA) CalPERS is poised to adopt would allow a more dynamic approach to managing today’s challenges compared to the strategic asset allocation (SAA) the pension fund currently relies upon.

A SAA involves checking in every now and again (CalPERS adopts an SAA to determine its investment strategy every four years) and optimises at individual asset class levels, yet TPA is more continuous and optimises at the whole portfolio level for more efficiency.

“With TPA you are thinking about the portfolio on a more frequent basis.”

Ilmarinen, Finland’s €63 billion ($73 billion) pension insurer, is laying the ground to increase its equity allocation by as much as 15 per cent in a jump which could see public and private equity, as well as other assets with a higher expected return, ultimately account for up to 65 per cent of the organisation’s total assets under management.

In an interview from Ilmarinen’s Helsinki offices, chief invetment officer Mikko Mursula says the team is busy scenario testing and running simulations, working towards an anticipated two-year deadline to increase risk and with it, long-term returns.

The new strategy is the consequence of pension reform decreed by the Finnish government which is acting on the wishes of labour unions, the owners of Finland’s private sector pension system that includes investors like Varma and Elo.

“The reform improves private-sector pension providers like Ilmarinen’s opportunity to pursue better long-term returns on pension assets by carrying higher risk in investment portfolios,” explains Mursula, who will become president and chief executive of the organisation this summer.

“The unions are the ones who have negotiated the changes – we are just the executor. Our task is to invest pension assets safely and to reach high enough returns within the solvency capital framework.”

To enable Finnish investors to reach the new risk targets, the government is changing the solvency capital framework under which companies like Ilmarinen operate. That framework is specific to Finland, and differs from the EU’s stipulation on how much insurance and reinsurance firms must hold to cover potential losses.

Historically, equity is Ilmarinen’s strongest performing asset class and Mursula believes that with a long enough horizon, the increased allocation will bring the higher returns stakeholders seek.

But that is not to say the new asset allocation won’t come without side effects, like a spike in volatility which he warns will show up in choppy annual returns. Witness 2022 when Ilmarinen’s equity investments lost 10.2 per cent versus a 28 per cent gain a year earlier in 2021.

“The volatility of our annual returns will be higher, and it is very important to keep this in mind,” he says.

Another open question hangs over how to allocate the remaining 35 per cent or so of the portfolio to ensure these investments don’t have too much correlation with listed equity.

“We have to harvest correlation advantages with a much smaller portfolio than we’ve done before and we don’t know yet what it will mean,” he says.

Hedge funds hit by macro winds

As the team lays the ground for the new allocation to risk assets, one diversifying portfolio could become more important. In recent years, Ilmarinen has developed an 8-9 per cent multi-strategy, strategic allocation to hedge funds. Wholly outsourced to external managers, it specifically targets correlation advantages.

The recently volatile market has provided a good operating environment for active investors, but Mursula reflects that one of the most challenging strategies in the current climate is macro which has thrown off a disparity between managers and frequent “surprises” because of the impact of tariffs.

“Within macro there are good performers but also bad performers,” he says. “The problem is, we don’t know how tariff policy will play out from one month to the next. If you make a call and take tactical bets, you may be right or wrong. Nobody knows because the information changes all the time.”

The hedge fund allocation is not part of the tactical asset allocation. But like other investors, in today’s investment climate, Ilmarinen has been more active from a tactical perspective across equity, fixed income and FX.

The team always keep the strategic asset allocation – and the fact they are managing money with long-term liabilities – front of mind, but he says in “this kind of environment”, it makes sense to do “a bit more tactically”.

Ilmarinen’s in-house portfolio managers also sit in the asset allocation team, and it falls on them to oversee tactical asset management too. They have been allocated a risk budget within which they can make tactical calls, mostly using derivatives rather than cash.

In FX, recent strategies have included short dollar/long euro positions and long Swiss franc/short dollar, while in equities and fixed income, they are altering exposure across specific stocks, regions and at a country level.

He notes that investors have grown more sceptical of the US in light of the policy backdrop, which has put pressure on the dollar.

“This is the reason investors outside the US are short US dollars –  it wasn’t the case last year or the year before.”

However, he clarifies that any strategy to short the US dollar does not refer to how Ilmarinen is in absolute terms.

“I am referring to our position relative to our benchmark,” he explains. “In the benchmark, we are always long the US dollar. We have got over 30 per cent of our allocation to US dollar assets so ‘going short’ is always relative to benchmark.”

New opportunities in defence

Elsewhere, Mursula reflects that new opportunities in defence will open up following NATO leaders agreeing to increase defence spending to 5 per cent of their countries’ economic output by 2035.

Ilmarinen changed its ESG guidelines in 2024 to open the door to investing more in defence.

However, building up the allocation since then has been difficult because opportunities are thin on the ground. There is a limited universe of public companies in listed markets in Finland, the Nordics or Europe, and the money chasing the sector means many of these companies are valued too highly to make compelling investments. Nor do private markets offer many opportunities, given many of these companies are state-owned.

“NATO’s budget for defence is about to go higher. It means companies need to fulfil demand so we may see investment in defence really start to happen,” he says.

Ilmarinen invests around 20 per cent of its assets in Finland. Of this, around 55 per cent of the global equity allocation is in Finland, but he notes this has fallen compared to what it used to be because of changes to the asset allocation and the declining performance of listed Finnish stocks.

Moreover, he says that many listed Finnish companies derive the vast majority of their annual turnover from overseas. “The business risk is not Finnish-centric,” he concludes.

Singapore’s Temasek is contemplating allocating more capital to core-plus infrastructure projects, especially investments related to data centres, energy transition and ageing facilities as the S$434 billion ($338 billion) fund walks the balance between risk and return. 

In a post-annual results media briefing, chief investment officer Rohit Sipahimalani said infrastructure was an asset class starved of capital, particularly around AI, and presents significant opportunities. The fund deploys capital via direct, partnerships and fund investments. 

“We are not looking at basic infrastructure, which is already up and running and generating cash flows, because the returns there probably do not meet our thresholds,” he said. 

“That is why we are looking at core-plus infrastructure, where there is some development part, but they also have stable, long-term contracts with some inflation protection.” 

An example of Temasek’s core-plus investment is the establishment of energy provider O2 Power in India alongside European asset manager EQT in 2020. The company was sold this March for $1.5 billion.  

The fund also invests in Brookfield’s renewable-focused Global Transition Fund, and is part of the AI Infrastructure Partnership group that funnels capital into AI-related projects, established by BlackRock, GIP, Microsoft and MGX. 

Sipahimalani said core-plus infrastructure is a great source of cash yield which the fund appreciates in uncertain times. It also finds private credit attractive for that exact reason. Temasek is likely to stay away from higher-risk private credit but chase strategies with low double-digit returns and high yields.  

He said core-plus infrastructure and private credit might not offer high returns like a leveraged buyout, they are attractive because they offer a “narrower range of outcomes”.  

Last fiscal year, a standalone private credit platform called Aranda Principal Strategies was carved out of Temasek’s in-house credit team. It manages a S$10 billion ($7.8 billion) portfolio of Temasek’s funds and direct investments.  

Temasek does not disclose asset class allocations, but Aranda sits within Temasek’s partnerships, funds and asset management companies category, which represents 23 per cent of the total portfolio. The other two segments are Singapore-based companies (41 per cent) and global direct investments (36 per cent).  

“Given the fact that compared to the last decade when interest rates were close to zero, base rates have gone up, we find it gives us pretty attractive returns with relatively low risk,” Sipahimalani said.  

Liquid alternatives like multi-strategy and macro hedge funds are another focus of the fund which Sipahimalani estimates could secure “fairly stable double-digit returns” regardless of equity market environment.  

China story 

In terms of geographic allocations, Temasek’s exposure to China has hit a decade low in 2025 as the fund gradually shifted its capital to US and European markets. However, Sipahimalani believes there is now less downside risk in China’s economy as the government pledged to cushion any growth shocks, not to mention that asset valuations are “quite reasonable”.  

The fund’s exposure to China decreased from 19 per cent of the portfolio in 2024 to 18 per cent in 2025, although in dollar terms the allocation is up by S$4 billion ($3.1 billion). Still, there has been a meaningful reduction compared to a recent high of 29 per cent allocation in 2020.  

Underlying portfolio exposure. [Click to enlarge]
Sipahimalani said while he does not see a “rapid recovery” of Asia’s largest economy due to sluggish consumption and real estate market, some Chinese businesses in consumer goods and food and beverage sectors are throwing up attractive opportunities, such as Pop Mart – the brand fuelling a global craze for its toothy Labubu dolls.  

“We need to shift our priorities to align with views of China as a more mature economy,” Sipahimalani said, adding that the nation will not see the same level of explosive growth as it had in the past decade.  

“In the renewables space, there are significant opportunities like in EVs and batteries. Also, we recently invested, for example, in companies operating commercially distributed solar generation, like rooftop panels.” 

Four of Temasek’s top 10 listed holdings are Chinese enterprises including WeChat owner Tencent, e-commerce giant and new AI infrastructure darling Alibaba, delivery service Meituan and Ping An Insurance.  

Over half (53 per cent) of Temasek’s portfolio is anchored in just three countries: Singapore, China and India. But Americas (24 per cent) is the second largest single allocation after the domestic market (27 per cent), and Europe, Middle East and Africa claimed 12 per cent.  

Its offices in Americas, including New York, San Francisco, Washington DC and Mexico, accounted for the lion’s share (33 per cent) of the S$155 billion ($120 billion) direct investment portfolio.  

The decrease in China exposure was only natural as Temasek repositioned as an Asia-focused investor to a global fund, Sipahimalani said. Moving forward, adjustments to geographical allocations will be “marginal” and hinged on bottom-up opportunities and individual market performance.  

“We are quite happy with the relative positioning we have across markets… you will not see the same level of changes or big moves that you saw over the last decade,” he said.  

US looks expensive 

Contrary to what it is seeing in China, Sipahimalani said US equity valuations are looking high at 22 times earnings.  

“They are probably at the top decile of the last 70-80 years. We have to be disciplined and conscious when we make investments,” he said.  

“In the medium term, there is always going to be the debt issue but we do not think that is an immediate issue. But we have to think about that with a long-term perspective, and what it means for the US dollar.” 

The fund is also grappling with the biggest investment question in the past few years, which is what it would take for US exceptionalism to collapse. However, Sipahimalani admitted that he does not have a clear answer yet and expects the US to remain the biggest recipient of its capital unless some extraordinary event happens.  

“There is nothing we can foresee [to make us pull back from the US]. Things happen that none of us can predict,” he said. 

“AI is a clear example. Nothing we can foresee will cause us to change that. We had mentioned last year about our plans to invest $30 billion over five years in the US and we are well ahead of that pace.” 

Temasek has been shifting its portfolio to businesses that are less likely to get caught in the crossfire of trade conflicts in the past several years – a strategy that is paying off with US’ renewed threats on several trading partners, including a 10 per cent levy on BRICS countries this week.  

For example, in China and India, the fund does not have any investment that relies on exports to the world. The focus in India has been on financial services, healthcare and consumer businesses in the past few years.  

“None of them had any first order impact from tariffs. The same is true across most regions,” Sipahimalani said. “The second order impact, based on global growth, would impact everyone.” 

Temasek invested S$52 billion and divested S$42 billion last fiscal year. The 10-year and 20-year total shareholder return – a compounded and annualised figure which includes dividends paid by Temasek and excludes investments from shareholders – is 5 and 7 per cent respectively in Singapore dollars.  

North Carolina’s new Republican state treasurer Brad Briner believes he has moved a step closer to overhauling enduringly weak investment performance at N.C Retirement Systems by ditching the sole fiduciary model for a five-person board of trustees.

Legislators recently approved a new governance model that Briner is convinced will open the door to the $127 billion North Carolina Teachers’ and State Employees’ Retirement System’s (TSERS) ability to take more risk and earn higher returns. It’s a message he sold hard in his campaign rallying call to North Carolina’s beleaguered employers, whose contributions have steadily risen in support of the pension fund, and the state’s retirees, who have had no COLA adjustments for years.

But North Carolina’s pension fund beneficiaries may have less influence on the new, five-member board than the state’s taxpayers. There will be no board representation for beneficiaries, and North Carolina’s politicians will get to decide the makeup albeit with a keen focus on hiring investment experts. Briner is chair and will also appoint one member while the other trustees will be selected by elected politicians comprising the Governor, House speaker and president of the Senate.

Briner is also loath to expand the board because he believes a small board preserves the best features of the sole fiduciary model: decisiveness.

“Decisiveness is endemic of good investment decision making,” says Briner, speaking to Top1000funds.com from North Carolina’s Raleigh investment offices.

Moreover, unlike other public pension fund CIOs who argue that pension plan trustees’ only obligation is to beneficiaries, Briner believes that taxpayers and beneficiaries are two sides of the same governance coin.

He believes the pension fund’s new trustees can wear two hats and represent both beneficiaries and taxpayers and taxpayers are just as important [as beneficiaries] because they are on the hook for poor returns from the pension fund.

“It’s the education piece I am always surprised more people don’t know,” says Briner who studied governance models at public pension funds in Virginia and Florida particularly, and whose investment experience includes a decade as co-CIO for Willett Advisors which manages the philanthropic and personal investments for Mike Bloomberg.

“To the extent the pension trust is exhausted, the pension obligations we incur in the state are the liabilities of the taxpayer. If you are a retiree in the state, you should feel great that the pension system is 89 per cent funded but feel even better because taxpayers have your back too. We pay those obligations under every scenario and the flipside as a taxpayer is that you can’t just be academically aware of this. You need to know if the trust is exhausted you are on the hook. The employer contribution, now over 17 per cent for our state, is coming from your tax dollars and there are ways to lower that by investing properly and ways to raise it by investing poorly – something we’ve been doing a lot. Enough with finishing last and burdening the taxpayer; enough with impoverishing retirees, let’s get this right,” he says.

North Carolina’s three, five and 10-year annualised net returns ending June 2024 came in at 1.9 per cent, 5.6 per cent and 5.6 per cent respectively.

Trustee competence assured

Briner says trustee competence will be assured by all candidates meeting certain stipulations.

They must have a minimum of 10 years of successful investment management and boast a record that demonstrates their passion, professionalism and technical expertise. Briner is looking for CIO-level candidates that come “purely from the buy side” to avoid any conflict of interest, and he says there will be no pandering to diversity in the selection process either.

“We want people who bring different perspectives and speak their mind, but I am indifferent to the exact physical package that comes in.”

Nor will there be any compensation.

Asking new trustees to volunteer ensures North Carolina won’t get people “for the wrong reasons” and he believes there are enough experienced candidates with subject matter expertise who are committed to the success of North Carolina to help.

“In the endowment world, many large boards are uncompensated, peopled by experts willing to serve. The job requires a couple of hours a week at most and their presence at big meetings quarterly.”

Increasing the risk

One of Briner’s key complaints with North Carolina’s sole fiduciary model is that it has prevented risk taking. He argues that because previous incumbents have been directly accountable for the performance, oversight and management of the portfolio they have been risk averse.

“The extreme public scrutiny that comes with the sole trustee model leads to risk aversion. A sole fiduciary will go to great lengths not to lose taxpayers money, yet over-reacting to short term downturns in the capital markets is expensive.”

Moving to a board model will allow the investor to be more methodical and executional and will introduce firm policies over “emotionally driven individual decisions.”

The new governance structure also shakes off the towering legacy of Harlan Boyles, state treasurer between 1977 and 2000, in office for a total of 25 years during which period he was re-elected five times. North Carolina’s large allocation to fixed income, maintained by subsequent treasurers, was a hallmark of his investment strategy.

“Harlen Boyles was a larger-than-life treasurer who did a fantastic job for the state,” reflects Briner. “He had a large allocation to fixed income that had always worked because base rates were higher. However, when base rates hit zero the pension fund remained stuck in the old orthodoxy because ever since everyone has looked back and said, ‘Harlan did it right and we need to do the same.’

First out of the gate Briner wants to increase the allocation to sub investment grade fixed income from 7 per cent and reduce investment grade fixed income, currently 33 per cent. He also wants to pare back on the 4.5 per cent allocation to cash, out of whack with a net spend of less than 2 per cent and North Carolina’s ample sources of liquidity.

New allocations will include mortgages that will either sit in opportunistic fixed income or real estate.

As for private assets, he’s in no rush to develop an allocation to private credit or “dive” into more private equity just yet.

“I’m conscious that while interest rates have gone up on the average leveraged private transactions, entry multiples for equity have not declined and this is a challenge of basic maths for private equity.”

He says it’s possible for investors to find exceptions to that average in allocations like LP secondaries and says leading GPs are more open to dialogue in the current environment.

As well as adjusting the allocation, Briner wants to update the legal list which prescribes which asset class North Carolina can and can’t own, untouched for 15 years.

He also plans to build out the investment team that has been whittled down to 19 from a high of 45. An empowered team under the revived leadership of former CIO Kevin SigRist, who Briner has brought back to lead on investment will be supported by a new investment authority backed by policies, procedure, staff and IT, supported by a budget set by the board.

“I knew I could make a difference in a way that mattered, and I wanted to run for it,” concludes Briner. “In reality people are not paying as good attention to the pension systems as they should, they matter tremendously, not just to the people involved in the retirement system, but to every taxpayer in the state.”

A quest for manager and fund strategy diversification has led the largest pension fund in the world, Japan’s Government Pension Investment Fund, to reach a decade-high allocation to active global equities.  

Actively managed assets now make up 17.8 per cent of GPIF’s ¥61.9 trillion ($423.6 billion) foreign equities portfolio as of March 2025, according to its annual report published last week. 

Across the whole fund, the proportion of active management is also increasing in domestic bonds, while foreign bonds and domestic equities are trending towards passive.

Percentage split of passive and active investment

FY2015 FY2020 FY2024
Domestic bonds Passive 82.50 72.93 54.33
Active 17.50 27.07 45.67
Foreign bonds Passive 64.94 76.12 96.00
Active 35.06 23.88 4.00
Domestic equities Passive 81.52 92.97 95.40
Active 18.48 7.03 4.60
Foreign equities Passive 84.15 87.99 82.20
Active 15.85 12.01 17.80
Total Passive 79.28 82.69 81.84
Active 20.72 17.31 18.16

Source: GPIF 2024 annual report 

The overhaul of GPIF’s active equities portfolio, whose centrepiece is a “scientific framework” of manager selection, began in 2021 when the seven active foreign equity managers GPIF employed at the time simultaneously underperformed their benchmarks. 

Last fiscal year, the $1.7 trillion pension fund said it had finished dividing the active equity portfolio into four regions: North America, domestic, developed markets excluding Japan, and developed markets excluding North America.  

The portfolio now consists of 103 funds, including active funds and completion portfolios called “beta balancers”, with a value of ¥17 trillion ($116 billion). The number increased fivefold compared to five years ago when GPIF only invested in 20 active funds. 

Wake-up call 

The underperformance of the seven active managers in FY2021 was a wake-up call for GPIF, as the correlation of each fund’s excess returns increased when market volatility surged in the second half of that fiscal year due to Russia’s invasion of Ukraine.  

GPIF immediately reduced its active equity allocation by ¥2 trillion that year as it considered how to reduce concentration risk that comes from allocating to similar funds.  

The solution it came up with was a new “scientific framework” of manager selection, which uses quantitative and statistical models to analyse investment styles. It will identify managers and funds that can deliver consistent, “style-adjusted alpha” by evaluating a fund’s performance against a benchmark in their intended investment universe – for example, a small cap fund in the US will not be pitted against the regular benchmark dominated by large mega cap stocks. 

Some passive beta balancer funds were also created to ensure the fund stays close to the benchmarks of its policy asset mix.  

But despite its reboot, the total active equity portfolio underperformed the benchmark by ¥71.6 billion ($487.2 million) in FY2024.  

The beta balancers weren’t able to offset the active risks sufficiently due to some market events driving significant price movements above GPIF’s expectations. In the annual report, Yoshizawa Yusuke, who rose from the deputy position to become the CIO this April, pointed to the sharp drop of Japanese equities last August partially triggered by a surprise rate rise from the nation’s central bank, and surge in some US stocks between October and December prior to the US presidential election.  

Expanding the manager pool has been a focus of GPIF in recent years, as the fund last year scrapped several hurdles – such as AUM and years of service requirements – for smaller and upcoming managers who want to offer their services. GPIF invested with 41 managers and 216 external funds across all asset classes as of this March.  

Modest return 

GPIF logged a modest 0.71 per cent total fund gain in FY2024 and a 4.2 per cent annual rate of return since FY2001. Foreign equities was the biggest contributor last fiscal year with a 6.62 per cent return while domestic bonds saw the biggest loss of 4.47 per cent.  

The fund’s asset allocation consists of domestic bonds (27.64 per cent), foreign bonds (24.37 per cent), domestic equities (23.94 per cent) and foreign equities (24.05 per cent), combining with a 1.63 per cent alternatives allocation. It reduced foreign equities and added mainly to domestic bonds during FY2024 due to rebalancing.  

Over the last decade, the proportion of actively managed domestic bonds shot up from 17.5 per cent to now represent 45.67 per cent of the asset class. The reverse trend is seen in foreign bonds whose share of actively managed assets dropped from 35.05 per cent to 4 per cent.  

GPIF said it terminated various “comprehensive active funds” in foreign bonds as it became difficult to control foreign exchange, interest rates and credit risks. Instead, it has been enhancing its lineup of region-specific and security-type-specific passive funds. 

In alternatives, GPIF invested in four infrastructure projects, two private equity deals, and one real estate deal during FY2024.  

GPIF revised its policy asset mix for the five years beginning this April, after six rounds of discussions with the board of governors. Due to its size, the fund’s investment strategy tends to influence other asset owners in Japan such as corporate pension plans and the asset mix tends to be closely monitored. 

The target asset allocation is still split equally four ways between domestic and foreign bonds and equities, but it has introduced tighter deviation limits for each asset class.  

Alternatives have an upper limit of a 5 per cent allocation and each asset is classified into one of the four equity/bond asset classes depending on its return profile.