World's Largest Pension Fund Starts Search for Alternative Investments

 | Apr 11, 2017 | 11:00 AM EDT
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Japan's Government Pension Investment Fund today begins its mission to allocate to alternative investments, a first step along a path to possible riches for international money managers.

It has called for applications from asset managers willing to create separately managed accounts containing funds of funds for the GPIF to invest in private equity, infrastructure and real estate, mainly outside Japan.

Registration runs from Apr. 11 through a review process that starts Jun. 1, and there's an orientation meeting for asset managers on Apr. 17 at the GPIF's offices in Tokyo.

The GPIF is the world's largest pension fund, with $1.2 trillion in assets, according to the latest ranking from Pension & Investments and Willis Towers Watson. That had risen to $1.3 trillion the last time the GPIF reported its figures. 

Its allocations are often viewed as a guideline that other pension funds in Japan follow. As a result, its decision to move into alternatives promises to encourage many more managers to allocate to the asset class. The GPIF has a negligible 0.05% exposure to alternatives now. 

The move "has larger percussion for Japanese investors," Yukihiko Ito, managing director of Asterisk Realty & Placement Agency, says. "Through the adoption of outside experts who have high-level skills and experience, they wish to promote sophistication and diversification of their asset management."

If Japanese institutional investors, including its pension funds, insurers and banks, were to allocate just 2% of their portfolios to real estate, that would amount to $172 billion in fresh assets under management. Japanese institutions are ultimately likely to begin with a 5% exposure to alternatives, Ito believes, which would equate to $430 billion in AUM.

For private equity, the GPIF is seeking global exposure with a fund of funds offering diversified exposure to a variety of PE strategies. With infrastructure, it is again looking globally, this time for underlying funds with exposure mainly in developed countries, and mainly to core, yield-generating assets or brownfield sites.

Its real-estate needs involve two allocations. It is looking for exposure outside Japan to a fund of property funds with underlying core holdings that generate stable income, again mainly in developed nations. It also wants to hire a Japan-focused manager to create a fund of funds, again investing in core real estate but within its home nation.

The funds of funds portfolios can contain either global funds or regional ones that have mainly developed-market exposure -- such as to North America or Europe.

It is excluding underlying funds that invest predominantly in listed entities, meaning that it essentially wants direct exposure to real estate in the case of that asset class. Real estate investment trusts count towards the equity exposure of pension funds in Japan, and not as alternative investments.

Japan Post Bank, which has $1.7 trillion under management, has also said it is actively pursuing alternative investments, including overseas real estate and private equity. It has traditionally invested in Japanese government bonds, but is abandoning that strategy in favor of an international, diversified portfolio.

That move was likely, as I explained at the time, when last July one of Japan's Big Four public pension funds, the Chikyoren, selected its first manager of international real estate. It picked UBS (UBS) and its subsidiary UBS Asset Management for that exposure. The $185 billion fund also selected J.P. Morgan Chase (JPM) , via J.P. Morgan Asset Management, to oversee its international infrastructure investment.

Blackstone (BX) , as the world's largest private-equity manager, and BlackRock (BLK) , as the world's largest fund manager in general, are also logical destinations for at least some of GPIF's money. 

Real estate has been an extremely touchy subject in Japan after its pension funds and many corporations lost billions in the asset class when Japan's bubble economy burst in the late 1980s. Japanese pension funds are still prevented legally from investing directly into real estate itself, although they are negotiating with the Ministry of Health Labour and Welfare to be able to put money into limited partnerships. 

Pension funds are being forced to seek out modestly riskier, higher-yielding strategies than they have in the past, a shift in terms of risk profile but a great change with tradition. Japanese government bonds yield virtually nothing, the current rate standing at 0.05%, and holding Japanese yen is even worse. That is nowhere near matching the long-term obligations of the pension funds, which are attempting to defuse a demographic time bomb caused by the country's aging population.

The GPIF's decision "serves as a green light for all Japanese institutional investors to start global real estate investment," Ito says, after a long hiatus.

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