5% Towards Alternative Investment to Provide Diversification, Long Term Duration, Link to Inflation
10th July GPIF, the world`s largest public sector investor with over 137 trillion JPY (over 1.15 trillion USD), released a report covering its activities in 2014. The report has indicated advancement towards investing in real estate. They plan to allocate 5% towards alternative investments which include real estate, infrastructure and private equity. Alternative investments will be classified as overseas/domestic equity or overseas/domestic fixed income depending on the nature of the investment and the risk associated with it. GPIF have invested in a joint overseas infrastructure fund in 2012. At the end of 2013 they had invested a total of 5500 million JPY towards it. Industry professionals were interested to note that this investment was classified as alternative investment in their fixed income portfolio.
Alternative Investments for Diversification, Long Term Duration, Link to Inflation
GPIF has outlined general requirements for investments as diversified, long term, and with enough liquidity to match with liability. Although the market values are fluctuating, they believe long term investments will be able to extract the fundamental values and ultimately ensure sufficient returns on investments. GPIF are predicting a general increase of pension reserve for the next 25 years, thus liquidity is not required to be high. However, in order to distribute pension, GPIF require sufficient liquidity in investments. With the aim of 1.7% + wage growth rate returns, GPIF trades high returns in favour of stable and low risk investments.
Real Estate – the Biggest Asset in Alternative with Overseas Investments
It is assumed that real estate will be the biggest allocation under its 5% allocation of alternative assets (over 575 billion USD). Amongst changes such as improving internal compliance and risk management platforms, GPIF have sought to strengthen their team of specialists and as of February 2015 they have appointed an alternative investment officer. They have increased base salaries in order to recruit more experienced and professional specialists. They are currently recruiting a law specialist with experience in alternative investments and experience in liaising with overseas fund managers. This news has garnered much attention from real estate fund managers who are now monitoring Japan with the expectation that it will become a new capital source for global real estate.
GPIF`s Target Asset Allocation
The accumulated income from when GPIF started investing capital in 2001 to 2014 is over 50.73 trillion JPY. At the end 2014 the total amount of assets was over 137 trillion JPY. GPIF have successfully seen higher returns than they had targeted. Last year GPIF achieved a 12.27% yield, and saw a return of over 15.29 trillion JPY overall from all assets mainly from strong returns in domestic/oversea equity. They will continue to diversify and to increase the duration of their portfolio.
Domestic Fixed Income 35%
Domestic Equity 25%
Overseas Fixed Income 15%
Overseas Equity 25%
Short term Assets –
Domestic Fixed Income 60%
Domestic Equity 12%
Overseas Fixed Income 11%
Overseas Equity 12%
Short term Assets 5%
Japan – A New Capital Source For Global Real Estate
With GPIF`s move towards alternative investments, other Japanese pension funds and major institutional investors are expected to follow, thus many believe it is now the perfect time to enter the Japanese market.
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