Passive Strategy of World’s Largest Pension Questioned After $52 Billion Loss

Japan’s $1.3 trillion Government Pension Investment Fund posted its worst return since 2009 in fiscal year 15-16, officials confirmed last week.

They also disclosed the fund’s equity holdings for the first time, and it revealed a largely passive investment strategy. Some observers wonder whether the fund could improve its long-term prospects by taking a more active approach.

From Bloomberg:

The list of domestic shares owned by Japan’s $1.3 trillion Government Pension Investment Fund hews closely to the benchmark Topix index, which isn’t that surprising for a fund where almost 80 percent of investments are passive. But it means that in market downturns like in the past year, GPIF will struggle to increase assets.

“There’s more they can do,” said Masahiro Ichikawa, a senior strategist at the Tokyo-based money manager. “They should be more active with their currency hedging and their investments. They should also look to increase exposure to alternatives.”

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While criticism of GPIF’s passive approach to investing isn’t new, this is the first year the fund posted a loss since it doubled its allocation to stocks in 2014 and reduced its investments in domestic bonds, which were the only asset to return a profit in the year. The fund is taking flak on both sides, from those who want to turn back the clock to when it held more bonds to people who say it should become more of a stock picker.

“GPIF should invest more actively but from a long-term perspective,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. in Tokyo. “That’s the only way they can improve their returns.”

GPIF President Norihiro Takahashi, speaking after the results announcement on Friday, said the fund planned to use its allowable deviation limits when allocating assets, in a sign he will be flexible in managing the portfolio.

GPIF is unlikely to make any major changes.