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.  

Having completed its first year with a fully invested portfolio, the ¥11 trillion ($77 billion) Japan University Fund (JUF) is now ramping up active strategies and carving out country-specific passive allocations.

The fund is a young endowment only established in 2022 to support research and development at Japanese universities, whose output and quality have declined compared to international counterparts over the past two decades, according to annual indicators published by the Ministry of Education, Culture, Sports, Science and Technology (MEXT).

It sits within the Japan Science and Technology Agency and was seeded with ¥10 trillion by the Japanese government – 11 per cent as an investment, 89 per cent as a fiscal loan. Unlike traditional Japanese pension funds focused on meeting minimum return targets, JUF has a mandate to maximise returns within its risk limits.

As part of a new strategy focusing more on active management and closer manager collaboration, the fund has several RFPs in market including for active managers in US and emerging markets equity, as well as European credit. It is also preparing some country-specific passive equity allocations to reduce the current large, index-driven US exposure.

JUF prides itself on being a new breed of Japanese public allocators that are more adaptive to high volatility and structural changes in the markets, and new external managers who want to join the fund’s expanding roster should champion the same qualities, says co-chief investment officer and head of global investment Naoya Sugimoto.

“Typically, the public investors try to be more conservative, but we are not the case. We try to adapt the new world, and we ask managers to be more flexible as well,” he tells Top1000funds.com.

“And if they feel there are restrictions of [mandate] guidelines, then we can talk about the relaxation of the guidelines to reflect the new world of the investments or a new market.”

Sugimoto’s own career reflects the new age of finance professionals as the industry moves towards more quantitative and technology-based skills. Starting as an artificial intelligence researcher, he moved on to work in cryptography with a focus on microchip encryption, such as how personal information like fingerprints can be stored on passports.

He entered the finance industry as a quant researcher managing mortgage repayment models and valuations of rates derivatives at Credit Suisse in 2007. “I was not familiar with the market at all,” Sugimoto admits. “I was good at, you know, mathematics, programming and computer science.”

His background as an engineer and scientist gives Sugimoto a special affinity to initiatives at JUF and in 2022 he was headhunted from his then position at Goldman Sachs.

Hit the ground running

JUF had a 25.7 per cent allocation in global equities as at the end of March 2025, out of which 2.1 per cent is active investments, according to its annual report released last Friday. During FY2024, the fund added active strategies including in Japanese equity, Sugimoto says.

“We’re gradually implementing active management. At the beginning, we had to invest from day one, and we did not have time to select the [active equity] managers, so we started from passive ETFs and passive managers,” he says.

Global fixed income still represents the majority of the portfolio with a 65 per cent allocation – 50.2 per cent of that allocation is managed in-house, 6.9 per cent is external passive and 7.9 per cent is external active.

Managing a large portion of fixed income in-house allows the fund to more easily manage liquidity and risk, Sugimoto says, and is not just focused on returns

“We manage the forward balancing, the total portfolio risk level, and the total portfolio factor balancing like currencies or durations [through the in-house team]. So from that point of view, what the fixed income team is managing towards is not to beat the benchmark,” he says.

Alternatives, including private equity, private debt, real estate and infrastructure, account for 8.2 per cent of the portfolio and short-term assets like deposits make up 1.2 per cent.

The fund’s total annual return was 1.7 per cent but alternatives outshone all other asset classes with an 8.6 per cent return, due to valuation increases centred around secondary strategies, the annual report said. Global fixed income and equity, which also include domestic Japanese assets, delivered 0.2 per cent and 4.5 per cent respectively.

JUF’s mandate is to maximise returns within the risk tolerance of a 65:35 reference portfolio set by the government, and it uses a factor-based approach to control risk.

“For example, the US equity from Japanese investment point of view, they have the US equity local factors, and also US dollar currency factors. We are distinguishing that difference,” Sugimoto says.

“When we invest in the US corporates, there are interest rate duration factors, and also the corporate spread factors.”

The sweet spot

JUF’s current portfolio is intentionally more conservative than the reference portfolio because it is building a stable financial “cushion” for the eventual repayment of the government fiscal loan, set to begin in 20 years.

“We are overweight fixed income, but that is not reflecting our market view – this is reflecting the equity cushion accumulation,” Sugimoto says.

“Also we have a meaningful portion of private assets… It takes time for actual asset investment from commitment, and we see the vintage diversification [benefits] for the private assets.”

Sugimoto says for JUF, it’s more about finding the sweet spot between strategic asset allocation and a total portfolio approach.

“For controlling risks, the factor is important, rather than asset classes. From that aspect, we are part of total portfolio approach,” he says.

“But from the organisational point of view, they [TPA funds] are managing investments in a generalist style… they are managing whether the investment is above the target return of the total portfolio or below.

“Our approach is more like an asset class-based organisation, because we would like to accumulate the knowledge or experience in each team.”

With that said, JUF still actively encourages asset class teams to communicate and break down silos. For example, when the asset allocation team is forming macro views on matters like wage growth, the public and private equity teams may have on-the-ground input from their portfolio companies.

“That’s live activities or live sentiments that can be reflected to the asset allocation or vice versa,” Sugimoto says.

JUF’s next long-term objective is to achieve an annual investment profit of ¥300 billion and no later than FY2026 – an estimate of how much it takes to support the universities in the long term.

It will remain in the so-called “ramp-up period” of the portfolio until the policy portfolio allocation is achieved, which should be no later than FY2031.

Tohoku University was the recipient of the first government research grant funded via JUF in 2024, which will be distributed yearly for up to 25 years. Eight other universities are in the race this year, including the University of Osaka, Kyoto University, Waseda University, the University of Tokyo, Kyushu University, the Institute of Science Tokyo, the University of Tsukuba and Nagoya University.

University Pension Plan Ontario, the C$12.8 billion ($9.3 billion) plan that invests on behalf of five Ontario universities, doesn’t own many US treasury bonds, and the largest single exposure in the portfolio is Canadian.

But US policies under the second Trump administration have got CIO Aaron Bennett thinking differently about risks and opportunities in asset classes, and the team are incorporating different scenarios into their modelling and analysis.

The threat of additional taxes on foreign holdings of US assets outlined in Trump’s “big, beautiful tax bill” could drive some asset prices lower, for example.

Elsewhere, new investment opportunities have emerged in the rest of the world off the back of US policy like Germany’s “whatever it takes” plan to increase defence spending and overhaul German infrastructure, financed by the largest economic stimulus in decades.

Closer to home, UPP is already investing in Canada’s own nation-building projects, particularly in renewables.

“We are stress testing hard and thinking about wider risks and opportunities from the current US administration’s polices, and being careful about investments priced in such a way that reflects incremental risk,” Bennett tells Top1000Funds.com.

UPP has just posted its second consecutive double-digit return (10.3 per cent) and the strategy at the fund that was set up in 2021 shares many of the hallmarks of the Maple 8. Governance is independent and arms-length; there is a keen focus on purpose as well as a risk approach, rather than a dollar allocation approach, to investment. Indicative of UPP’s high allocation to private markets and direct participation models in the quest for low to no fees, the investor has also committed over C$1 billion to new private market strategies since 2022.

Yet unlike its much larger Canadian peers, UPP has much less internal investment and prides itself on tapping niche strategies, sometimes investing as little as C$100 million in a new fund commitment and a co-investment of just C$10-15 million.

A focus on active management

UPP currently has around 35-40 per cent of the portfolio across public and private markets in active strategies.

Bennett believes active managers performed well during the recent market volatility, successfully navigating sector concentration, accumulating cash and waiting for the opportunity to buy back into the market.

“We pay fees for additional return, additional diversification and risk management. It paid off during the recent market volatility when active managers were very well positioned.”

But he’s keen to fine-tune active management to ensure UPP “gets paid” for active performance in excess of the benchmark given the cost of active management. “Sometimes you can end up paying a lot more in fees if you are not careful,” he says.

UPP will increasingly allocate to managers that want to get paid to beat their benchmark with a performance fee, rather than a management fee. “We’ve moved a number of large active managers over to fee schedules that are more focused on getting paid when they do what we expect them to do – which is beat the benchmark.”

As UPP’s assets under management have grown and more pension funds have joined the investor has merged around 22 different benchmarks. Today those benchmarks are consolidated into one benchmark for each asset class. They are reviewed every year to ensure they make sense from an overall asset allocation and risk management position, and Bennett reflects that “by and large” they do the job.

For example, inflation-sensitive assets comprising real estate and infrastructure are typically benchmarked to inflation. “In infrastructure and real estate, we are focused on finding assets that have cash flows, value and distributions which are correlated to inflation over time, so a CPI+ benchmark is sensible.”

Still, looking ahead he is considering the benchmark for private credit. “Private credit is an evolving space, and the benchmark should be aligned to strategy. Overtime we might change the benchmark to better suit our criteria.”

A cautious approach to internal management

Internalisation of the investment process to foster greater control, transparency and lower costs is being built out slowly and Bennett describes a lean and efficient investment team with “every person counting.” To date, he has concentrated on the basics, internalising currency hedging and derivatives, and some passive equity and fixed income.

Looking ahead, he wants to manage UPP’s cash exposure to money market funds and build out fixed income and derivative in-house management to support total fund risk management internally, spanning leverage and overlay strategies.

“This way we can manage risk at the top of the house, while actively deploying externally to asset classes.”

He is confident UPP will be able to draw top talent as it expands despite Canada’s competitive market. He says staff are attracted to the organisation because of the opportunity to build something from scratch, as well as the investor’s forecast growth as more university plans decide to partner with UPP.

Another draw to talent is UPP’s modern appeal. “We have established investment beliefs in the context of a modern world. For example, we have a clear view of responsible investment and are not having to integrate a programme around change management.”

He adds that DEI at the investor where two women (CEO and board chair) occupy senior roles encourages the belief that people can grow their careers. “Young professionals can see themselves reflected in senior management at UPP in a way that might not be the case at other organisations. Talent recruitment and retention remains a focus and this has made it easier for us.”

Bennett is also focused on growing the allocation to climate solutions where UPP has already poured C$650 million, on track to have invested $1.2 billion globally by 2030.

Strategy is shaped around being careful not to invest in assets heavily reliant on, or that require, subsidies from governments. Diversity is ensured by a global approach that spans different tech, countries and regulatory regimes, he concludes.

Our North American Capabilities

In this short video, John Ma, Partner & Co-Head North America, and Varun Sablok, Managing Director discuss opportunities in North America for middle-market infrastructure investors highlighting the strong potential in four key sectors; Digital, Transportation, Power, and Water & Waste.

Why Direct Infrastructure?
Michael Ryder, Partner & Co-Head North America, and Hamish Wilson, Partner, Head of Europe share the key characteristics they seek in direct infrastructure investment opportunities. They explain why they believe these investments offer clients a well-balanced mix of risk and return and leverage Igneo’s 30-year track record of investing in the lower-middle market.

The $206.5 billion Korea Investment Corporation (KIC) has become the latest asset owner weighing a shift into the total portfolio approach (TPA) in an attempt to boost investment returns.   

KIC put out a request for proposal for a TPA consulting partner in May. A fund spokesperson confirmed that the review is underway and will continue into early next year, telling Top1000funds.com: “We are considering the introduction of this new investment framework to expand our role as a fiduciary manager and to enhance investment returns.” 

The deliberation came as KIC celebrated its 20th anniversary in Seoul this week, where CEO Park Il Young outlined the fund’s goal to boost financial and organisational performance in the next decade.  

Its asset allocation as of last December was 39.5 per cent equities, 31.8 per cent fixed income, and 21.9 per cent alternatives whose build-out has been the fund’s focus in the past few years. It previously set a target of having a quarter of its portfolio invested in alternatives by 2025. 

Under the overarching goal to find a feasible TPA framework for KIC, the review will look to introduce a reference portfolio and a factor-based approach to dissect asset class exposures to risk and return drivers. It will also examine new ways to classify investments other than by asset classes as in SAA.  

The fund also wants to develop liquidity forecasting models by asset class and strategies and understand how risk and liquidity will be considered on a total portfolio level.  

KIC’s current risk management process considers market risks for traditional assets, namely equity and fixed income, and alternative investment risks separately. Market risks are managed through the SAA framework of tracking errors and portfolio volatility, while alternative risks are contained by designating allocation limits for external managers relative to total value of assets in each alternative asset class, and by monitoring factors like concentration, region, sector and vintage.  

Organisationally, the TPA review will determine whether it’s necessary to introduce an “integrated portfolio management” division and define their roles. KIC wants to align its framework with global practices so the review will involve extensive case studies of asset owners with existing TPA models. 

TPA organisations outperformed their SAA peers over the last decade by 1.8 per cent per annum, according to a study by WTW’s Thinking Ahead Institute of 26 asset owners. Despite its onerous demand on asset owners’ investment, risk, governance and even sustainability models, more funds are pondering the adoption of TPA (such as CalPERS) due to benefits including better alignment of portfolio goals and room for nimble, opportunistic investment.  

Well-known practitioners of TPA in Asia Pacific include Singapore’s GIC, Australia’s Future Fund, and New Zealand Superannuation Fund.  

Direct investments take centre stage 

Another key focus in the next few years for KIC is the ramp-up of direct investment activities within its $45 billion alternatives portfolio. This will be across all private market asset classes: private equity, real estate, infrastructure and private debt. 

KIC will leverage its five overseas offices and establish strategic partnerships with global asset managers, the fund spokesperson said. Three of those international offshoots are entirely dedicated to private assets investments: the San Francisco office homes in on private equity and venture capital due to its proximity to the Silicon Valley, while the Singapore and Mumbai units offer on the ground insights to real assets and private equity deals in emerging markets.  

The alternatives bucket has delivered an annualised return of 7.7 per cent between its inception in 2009 and the end of 2024, according to KIC’s latest annual report. Private equity was the bundle’s top performer with a 9.4 annualised return, where KIC began direct investment in 2010 and co-investments with GPs in 2011. 

Private debt was carved out as a standalone asset class in 2024 and the roughly $4 billion portfolio is still at an early stage of construction. The fund is looking to expand into areas like direct corporate lending and is seeking co-investment opportunities alongside asset managers. It acquired a minority stake in US direct lending and credit asset manager Golub Capital in 2022 to secure stable cash flows via loans to blue chip companies. 

In real assets, KIC is exploring emerging markets and niche sector infrastructure opportunities on top of those in mature markets including North America and Europe, focusing on residential real estate, logistics and data centres.  

Jonathan Grabel, CIO of the $87 billion Los Angeles County Employees Retirement Association, believes good processes form the bedrock of successful investment. Processes govern how investors identify the best opportunity and underwrite investments; they shape liquidity management, operational effectiveness, building the team and how staff provide information to the board, he tells Top1000Funds.com from the investor’s Pasadena offices.

“Investment involves an uncertain future state. Good processes don’t necessarily guarantee the best outcomes, but they are critical.  Strong processes, likely, increase positive outcomes by reducing impacts from uncompensated risks – mostly operational ones,” says Grabel, who has overseen America’s largest county pension fund since 2017.

Perhaps the most important element of the process is strategic asset allocation, where LACERA staff completed implementation of the latest asset allocation in January. The new allocation has built out investment grade fixed income and credit (both now 13 per cent) and reduced the allocation to global public equity to 28 per cent.

The adjusted portfolio allows LACERA to draw a greater contribution from higher interest rates both in terms of return and diversification and is the culmination of the triennial re-appraisal of multiple factors including changes in capital market assumptions, new philosophies to emerge in terms of asset allocation or best practice, and any movement in LACERA’s liabilities where the mature fund’s benefit payments exceed contributions.

“Our current asset allocation is set to perform in a period of heightened uncertainty. If you look at the environment over the last five months, you hear the word uncertain a lot and the best strategy during times of uncertainty is diversification. You never know what markets are going to do, but we take comfort in the excellent process behind our SAA that supports building and monitoring the portfolio,” says Grabel.

LACERA allocates to asset categories comprising a 48 per cent allocation to growth (global equity, private equity and noncore real estate) a 15 per cent allocation to to risk mitigation (core real estate, natural resources and infrastructure and TIPS) and a 24 per cent allocation to risk reduction (investment grade and government bonds, diversified hedge funds, and cash) as well as the 13 per allocation to credit.

The cash overlay (1 per cent) also showcases process in action.

LACERA created a cash overlay in 2019 to support liquidity needs and eradicate cash drag in a low-interest-rate environment. The overlay was also created to support rebalancing and help reduce over and underweights on a daily basis to better adhere to the strategic asset allocation. It was put in place as a risk mitigant rather than a source of alpha, but the overlay has generated over $500 million of gains.

“The cash overlay allows us to best manage liquidity by being able to hold more than our 1 per cent allocation yet no be penalised by a drag on performance. The cash we hold above 1 per cent is equitised based on our SAA so we can offset under and overweights at the functional asset category level.”

LACERA has also introduced a 90-day rolling cash forecast to ensure it has at least three months of cash equivalents on hand for benefit payments, operations and investment purposes. “It’s something we have maintained since 2020 and ensures we have sufficient liquidity at all times,” he says.

Staff must ensure their direct portfolio does its job and performs based on the mandate, without losing sight of the indirect asset classes that influence their portfolio and the wider contextual environment, he says. For example, a good private equity investor needs to understand the cost of capital and credit markets because it’s a key component of financing private equity.

Gabel says the biggest driver of the whole portfolio is beta, which sets the direction of the portfolio’s performance.

Sources of alpha

That said, the most important source of alpha has come from LACERA’s 13 per cent allocation to credit, the best-performing functional asset category for the last three years. The allocation doesn’t differentiate between private and public credit (analysis showed that the private allocation was actually more liquid) and focuses on moderate risk, eschewing distressed assets.

“A key return component is yield.”

The standalone allocation was set up in 2019 when Gabel brought all LACERA’s disparate credit exposure and benchmarks that spanned high yield to syndicated bank loans, hedge funds and real estate debt into one allocation with a single benchmark to mandates to 12 key relationships. The core element of the portfolio is allocated to separately managed accounts in evergreen structures rather than having to continuously invest in funds. Benefits include hard fee hurdles and more profit retention for LACERA than investing in funds, he says.

Elsewhere, numbers show alpha is much higher in private equity co-investment rather than fund investment, but in another example of process at work, the allocation to funds supports co-investment and is an example of LACERA using “all the tools” at its disposal. LACERA has a 17 per cent target allocation to private equity, divided between direct (co-investments and secondaries) and fund investments.

The benefits of investing with emerging managers

LACERA allocates to emerging managers in credit, public equity and hedge funds, and is about to roll out emerging manager mandates in real estate and real assets for the first time. Relationships are based around revenue sharing and securing capacity rates for subsequent investments.

“The goal of the emerging manager program is to enhance returns for the fund as a whole. By investing with emerging managers, we aim to find opportunities that might be capital constrained or more niche. We don’t want to just enhance returns, and we also seek investments that mitigate risk. Our goal is to have these programmes outperform underlying categories and hopefully secure future investment rights for LACERA,” he says.

Allocating to smaller firms that are earlier in their cycle is supported by policy statements and a belief that inclusive and equitably run firms that diminish groupthink will outperform because they tap into human capital alpha.

“LACERA’s investment policy statement says that effectively accessing and managing diverse talent leads to improved outcomes. We want to tap into human capital alpha. It is a dimension of our underwriting across the entire portfolio that reflects that we think that people matter. We believe that we have a fiduciary duty to have the best collection of people manage assets on behalf of our members.”