Keeping perspective

Gavin Blair: It was a bad year for investments, particularly stocks, worldwide. How did the GPIF perform against that background?

Nobosuke Tamaki: Earlier this month we published the annual results, and obviously we lost over Y9trn (US$95.3bn) – and that’s not a nice number. One of the characteristics of this fund is that it’s big, very big. We have Y118trn (US$1.2trn), CalPERS has the equivalent of Y17trn, CPPIB has Y8trn and GPF-G of Norway has Y30trn. The US Social Security Trust Fund has $2.4trn or $2.5trn, so twice or more as us in yen terms, but they don’t invest in the market. In terms of market investors, we are the largest in the world, and in terms of the global financial market, that’s quite significant. 

For our policy asset mix, around 75% was made up of domestic and international bonds at the end of the last fiscal year, and about 20% for domestic and overseas equities – so our exposure to equity markets is lower. Therefore our losses of around 7.5% were lower than most other pension funds, which lost around 20% or more. The Norwegian fund lost a lot, but because the entire fund is invested overseas, it benefited from the depreciation of the kroner. The yen on the other hand, appreciated sharply, especially against the euro – our exposure to euro-denominated assets cost us. In local currency terms we earned 7.51% but in yen terms –6.56%. Same thing goes for stocks, we lost only 36%, but in yen terms, 43%. 

So Y9.3trn is such a large number, but in percent terms, reflecting our asset mix, it’s not so bad. Compared to private sector pension funds in Japan – which have around 30% of their assets in domestic and overseas stocks – which were down an average of 17% last year.

Gavin Blair: So did the more conservative approach of the GPIF help protect it during the recent market upheavals?

Nobosuke Tamaki: If you define conservatism as a greater proportion of assets in bonds and less for equity, then yes. Though sometimes long-term bonds are not a very conservative investment. In the last decade or so in Japan, long-term interest rates have stayed in a very narrow range but in Europe or the US there can be changes of 50 basis points in a month. Generally speaking, bonds are less volatile than equity, especially recently in Japan. Although our equity portion is smaller than others, with only 20% or so exposure to equities – three years ago we made Y8.9trn and last year we lost as much as that. 

Gavin Blair: The last two year’s losses take the value of the fund back to 2001 when it was launched – how will the GPIF get back on track?

Nobosuke Tamaki: Back on track? I don’t think we’ve been derailed. We will try to do what we can while we stay within the permissible range of policy asset mix. The whole fund used to be deposited with the Ministry of Finance. But since 2001, when we redeem deposits for example, that money comes back. In the first half of last year, as deposits were redeemed, we bought stocks. So if you look at the allocation for domestic bonds – Y4.1trn for the year– we bought in April, May, June, July but from November on, it was zero. For stocks, it was the opposite. The equity markets were going down but because the actual figure was below the policy asset mix, we put fresh cash into overseas and domestic stocks as these two asset classes were below their allocation. This is the way of our business, we do not get involved in short-term tactical asset allocation. So in this sense – we are already on track. 

Gavin Blair: The Ministry of Welfare’s target of 4.1% profitability by 2016, is that possible?

Nobosuke Tamaki: Well 4.1% is not the most important number for us. Our pension benefits are linked to wages and prices so for the pension account to be sound our investment return should exceed the rate of increase or decrease of wages and prices, with some nice margin. Actuarial revaluation results were released in February this year, and this was done on the basis of a number of long-term assumptions, such as consumer price inflation of 1% and a real wage increase, on a nominal basis, of 1.5%. This is done every five years, by law. The last time it was done, it included a rate of return that is 1.1% above nominal wage increase. Then, the actual rate of wage increase, or in fact decrease, was -0.16%. Our rate of return averaged 2%, so while our performance of the last couple of years isn’t what you would call ‘spectacular’, our rate of return has beaten the evaluation of five years ago. 

Gavin Blair: How will the strength of the yen affect strategy?

Nobosuke Tamaki: In very macro-economic terms, when the yen will fall or the pound rise, is very difficult to predict. The current policy asset mix was given by the government a few years ago but under the new regime the GPIF will first determine the policy asset mix and then get approval from the Ministry [of Finance]. We are now in the process of studying what the next policy asset mix will be. There are many elements to consider: the history, tradition and size are all factors. Let’s say we decided to become very aggressive and switch to 100% equity, then we would need to sell our government bonds, some 60% to 70% of the fund, to the market – it’s impossible. 

Gavin Blair: How will the events of the last year, which were a shock to almost everybody, affect the fund’s strategies?

Nobosuke Tamaki: What happened last year was really unusual in a few respects. Nobody knows when the market will pick up. Our thinking is always long-term and when we made more than Y8trn we didn’t boast about it; last year we lost a lot but our policy is still focused on the long-term. If you compare our actual performance compared with our evaluation, it’s still beating those figures. 

Gavin Blair: Is the shock of last year likely to make the fund more wary of buying overseas stocks? 

Nobosuke Tamaki: Not necessarily, last year was a bad one but this fiscal year we’ve seen more than a 10% rise – that’s the market. Three years ago when we made Y8trn, we were happy to see Japan’s economy recovering, but it didn’t make us think suddenly Japanese equities were best. We’ll continue to diversify. 

Gavin Blair: There’s been talk of both splitting up the GPIF1, CalPERS-style, and also of amalgamating it with other pension funds2. 

Nobosuke Tamaki: There has been some talk, about dividing the GPIF into more than one fund. The rationale for splitting the GPIF into baby funds, or sub-funds, is that if a fund is too big, performance is worse, so smaller is better. In reality though, is it actually going to improve the rates? Nobody knows. If we split into 120 Y1trn funds, some would do better, some worse. Would the aggregated results be any better? 

Another way would be splitting the GPIF into a few funds and let them compete. Let’s say it was split into five funds – then it needs five presidents, five vice-presidents, five annual reports. Then Fund one might sell share A and Fund three may buy it, so costs are added. So you have to compare added costs – which are certain – to the improved results, which are not.

Gavin Blair: There have also been proposals to combine the GPIF with other pension funds?

Nobosuke Tamaki: It was proposed some time ago to combine the GPIF with the pension funds for government employees. It was sent to parliament and a final decision hasn’t been made – it’s still there. 

Gavin Blair: There was a lot of talk this time last year in Japan about a sovereign wealth fund; has the financial crash made this less likely? If it does happen, what effect would it have on the GPIF? 

Nobosuke Tamaki: There are now fewer voices in favour of a sovereign wealth fund than a couple of years back. The main sovereign funds are run by oil-producing countries which have small domestic capital markets. In Japan, the pension money is being managed by us, and there are some arguments or suggestions for allocating some of the funds to some other types of investment vehicle. It’s one plausible argument but we have our mandate to work to and so, it’s a different context in Japan. It only partially overlaps with our operations and I can’t see it affecting us in the near future. 

Gavin Blair: You still have a relatively small staff?

Nobosuke Tamaki: Yes, less than 80, so per capita we manage more than Y1trn. 

Gavin Blair: How has the working of the GPIF changed since becoming more independent in 2006?

Nobosuke Tamaki: We can now make initial decisions, on matters such as the asset mix, and send them to the Ministry for approval. Nothing has been refused approval yet and I can’t see that happening in the future. Though if the minister should think that going into some particular market was best for the fund, then he or she would tell us to. 

Gavin Blair: What managerial changes have taken place over the last year?

Nobosuke Tamaki: We now have a lot of fund managers with mandates and the full list is in our annual reports. Every year we make changes and adjust the amounts they are given to invest or take back the money from them. Last year was a difficult year for active managers in equities.