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Philippe Desfossés: GPIF: the world’s biggest pension fund is on the move in equities and ESG

The sustainable output of the world’s biggest, politically-driven portfolio shift.

A few years ago, the world’s biggest pension fund, the JPY135trn (€1trn) Government Pension Investment Fund, Japan (GPIF) looked like it was in a deep slumber. Its asset allocation was deemed safe since it was heavily tilted towards Japanese sovereign bonds.
Then, Prime Minister Shinzo Abe came to power, introduced his new economic growth plan and suddenly something changed. Abe’s policy, branded the ‘three arrows’ – fiscal stimulus, monetary easing and structural reforms – sent a clear signal that it was time to give Japan a boost. The Economist characterized the program as a “mix of reflation, government spending and a growth strategy designed to jolt the economy out of suspended animation that has gripped it for more than two decades”.
The investment world realized something big was underway when, on February 26, 2014, a Japanese Council of Experts released a revised and finalized version of the country’s Stewardship Code to promote sustainable growth in companies through investment and dialogue with shareholders.
The Tokyo Stock Exchange (TSE) then formulated “Japan’s Corporate Governance Code” (the Code) and incorporated it as an Exhibit into its Securities Listing Regulations. The Code has the same content as “Japan’s Corporate Governance Code” finalized on March 5, 2015 by “The Council of Experts Concerning the Corporate Governance Code”.
The Code and the associated rules entered into force on June 1, 2015.
The second big change came with a massive reshuffle of GPIF’s asset allocation. It was the biggest, politically-driven portfolio shift ever seen.

  • Asset class – % before / % after
  • Domestic bonds 67.4% / 35%
  • Domestic equities 11.1% / 25%
  • Foreign Bonds 8.4% / 15%
  • Foreign Equities 10.1% / 25%Since then GPIF has almost realized this rebalancing, and by doing so more than doubled its exposure to stocks. It is worth remembering the rationale behind the decision, as Takahiro Mitani, GPIF President, explained at the time: “Our committee examined various sets of asset allocations which met the necessary rates of return in two macro-economic scenarios, an upside and a downside case, and analyzed these with multiple risk metrics”.
    As Japan is confronting a declining population, GPIF should be run in order to contribute to fund the benefits of later generations. To fulfil this mission GPIF must deliver 1.7 % per annum (quite an increase compared with the previous objective of 1.1%). As the massive buying of bonds by the Bank of Japan has depressed the asset class, it is logical that GPIF invest more in stocks. Some might say there is an implicit sharing of responsibilities: the BoJ looks after the bond market, the GPIF the stock market. This is excessive, but the increased exposure to stocks can be observed in some other places. The Norwegian Government Pension Fund Global recently announced it would increase its allocation to stocks from 60% to 70%. As those schemes are “pass through” i.e. in charge of transferring revenue from today into the future, it makes sense to invest in the productive capital of the economy rather in fixed interest bonds that don’t pay “much”. Just to illustrate: let’s recall that Austria recently issued a 70-year bond at 1.58%. The average return for stocks in Europe is almost twice that. For an investor, buying a 70 year bond paying 1.58% means it will be paid that coupon and, hopefully, get their capital back when the bond matures…in 70 years! There is no upside and such a return does not leave much room to absorb any bouts of inflation. A diversified portfolio of stocks, on average, delivers a much higher return and guarantees to the investor “a warrant” on the nominal growth of GDP. From this, one can conclude that GPIF’s new asset allocation is much better aligned with its mission.

The third move that is really big is the new importance of ESG issues in Japan. Being a very long-term investor, GPIF is conscious that taking into account ESG can make a big difference in the performance of the companies that long term investors invest in. Maximizing immediate return cannot be the goal of long-term investors. For them, what really matters (and it is not that simple) is to invest in businesses with sustainable business models. One way to do so is by implementing a pragmatic, no-nonsense Best-in-Class ESG policy. In fact, with differences due to governance or culture, most large institutional investors have already started to implement such policies. The election of Hiromichi Mizuno, Executive Managing Director and Chief Investment Officer of GPIF to the board of PRI is great news.Mizuno will bring his expertise and a much-needed Asian input to a global institution like PRI. It is hoped that the example of GPIF will also encourage other large Japanese Institutional Investors to follow suit. On December 5th, 2016, Paris Europlace, the group that promotes financial services in France held a conference in Tokyo. Many people attended a roundtable dedicated to discussing “Innovative asset management serving sustainability”. This is a good omen!
A few years ago, the gentle giant of GPIF awoke from its lethargy. Now it is on the move. This is good news for Japan, but also beyond its frontiers for other large institutional investors that might find inspiration in the way the world’s biggest pension fund is addressing its challenges.

Philippe Desfossés is CEO at the €26bn ERAFP pension fund in Paris, France.