The world’s largest pension fund has ended years of anticipation about its alternative investments programme.
Last week, the Government Pension Investment Fund, the $1.4 trillion Japanese pension fund, revealed its alternative investments in an exhaustive annual report for the first time.
As of end-March 2018, GPIF had invested 8.1 billion yen ($72 million; €61 million) across eight domestic private REITs in Japan. The biggest chunk was invested in office assets (40 percent), followed by logistics (23 percent). No overseas real estate investments have been made so far because GPIF is yet to award a mandate to any manager. However, the investor reiterated in its annual report that it will pursue a core strategy to focus on income gain and stable returns.
The wheels are finally in motion, more than three years after GPIF first signalled its intention to diversify its bonds- heavy portfolio in 2014. An overseas real estate commitment is the natural next step. While this is welcome news for capital allocators waiting for the “Japanese whale” – as one executive described GPIF – to kickstart deployment, they should also align themselves with the reality that the investor will be slow and steady in its investment approach. Notwithstanding its scale, GPIF is unlikely to pile billions of dollars to acquire trophy assets, like its peers in the Chinese investor community infamously did in their early days of investing overseas.
The slow pace could be viewed as both deliberate and market-driven. The attractiveness of investing overseas in gateway cities like the US is being punctured by high asset prices, hedging costs, and taxes that drag down returns.
Indeed, real estate and private equity investments comprise only 0.01 percent of GPIF’s total portfolio. Infrastructure commitments take up a relatively higher 0.13 percent, partly because this was the first alternative asset class GPIF debuted in 2014. That is understandable, given infrastructure’s long-term recurring income attributes. GPIF’s infrastructure investments have generated IRRs of 5.25 percent from 2014 to 2018. On the other hand, as real estate increasingly becomes more of a service than an asset, raising questions about its applicability as a bonds substitute, a measured approach to investing in the asset class is justified.
There are other constraints gradually being overcome. Until recently, GPIF did not have the regulatory clearance to participate in funds and other limited partnership schemes for alternatives so it had to limit itself to funds of funds and mutual fund structures. It is also actively recruiting staff to build in-house investing capabilities. A case in point is its appointment of the seasoned real estate executive Hideto Yamada, who brings international investing experience to the team.
Most of these factors are not specific to GPIF, but most large Japanese institutions looking to expand their real estate exposure. There are also cultural considerations that could take time to change. Industry experts highlight Japanese institutions’ bureaucratic style of functioning. One manager told PERE that some institutions still have a limited travel budget to go see potential assets and in some cases, it is hard to even get the board’s approval to travel. Another observer spoke of instances where Japanese investors wanted US core managers to show them the underwriting of every single asset in a fund.
GPIF’s pace of investments may be slow, but any tangible action on its part is largely seen as a cue for other Japanese investors to follow suit.
So, do not expect floodgates to open from the land of the rising sun. What is more likely is a steady increase in Japanese capital engaging the sector in the times to come.
To contact the author Arshiya Khullar, email email@example.com