Since the Abe administration took power in Japan in December 2012, there have been talks about the government wanting pension funds in Japan to be more active and creative with the capital they have under management. The capital these funds have accumulated over the years is staggering. The largest of them, the Government Pension Investment Fund, has $ 1.4 trillion under management.
And yet, as of now, most of Japan’s Government Pension Investment Fund capital is invested in stocks and bonds. According to the “Significance of Real Estate in Asian Pension Funds” survey presented by Dr. Graeme Newell at Institutional Real Estate, Inc.’s VIP – Asia Investor Roundtable conference held in Hong Kong in November, 60 percent of the GPIF’s assets are allocated to domestic bonds, 10 percent to international bonds, 16 percent to domestic stocks, 13 percent to international stocks and 1 percent to short-term investments.
I don’t need to tell you how low the yields on fixed-income instruments have been around the world in this global deflationary environment. Couple this with the aging population in Japan, and you get a pretty grim picture. Clearly, having 70 percent of the GPIF’s total capital allocated to fixed-income instruments will not allow the fund to create yields necessary to meet its obligations.
Realizing this, the Abe administration created the Panel for Sophisticating the Management of Public/Quasi-public Funds based on the Japan Revitalization Strategy adopted by the cabinet in June 2013. In September, the panel compiled a preliminary report that was finalized and became available to public in November 2013. As many of us expected, the panel advised, among many other recommendations, to “diversify investments by investing in new types of assets (including real estate investment trusts, real estate, infrastructure, venture capital, private equity and commodities).”
Creating a real estate portfolio, identifying investment strategies and finding asset managers appropriate for them will take time — and probably a lot of it. But if South Korea, Japan’s neighbor, can serve as an example, this is all achievable, and it is not too early for global asset managers with required skills to start lining up and sharpening their tools.
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Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.
