July 2, 2012 / 6:26 AM / 5 years ago

Giant Japan pension fund to dip toe in emerging markets

TOKYO (Reuters) - Japan's Government Pension Investment Fund, the world's biggest public pension fund, said on Monday it had selected six asset managers to make its first investments in emerging markets as it tries to boost returns in the face of rising payout obligations.

Known as GPIF, the pension fund, whose 108.1 trillion yen ($1.35 trillion) in total assets nearly matches the size of the Spanish economy, has become a net seller of its assets in recent years as it tries to cope with Japan's rapidly aging population.

Market analysts expected the investment in emerging market equities to start at around several hundred billion yen, too small to have a big impact on overall returns, but said the move was an important step to diversify the fund's portfolio.

"It's a natural move for the GPIF to take exposure in emerging markets to incorporate into the region's potential growth as it is becoming more difficult to raise returns only by investing in developed countries," said Hidenori Suezawa, assistant general manager at SMBC Nikko Securities.

"This will not lead to an improvement in its performance because the size of the investment is expected to be small. But it's important to watch how investments in emerging markets will grow in the future," he added.

The pension fund, which issued a tender for active and passive managers in October 2010, selected Invesco (IVZ.N), Nomura Asset Management, Nomura Funds Research and Technologies, Mizuho Asset Management, Sumitomo Mitsui Asset Management and Lazard Asset Management (LAZ.N). It said there were no suitable managers for passive investments.

Sources told Reuters in September 2011 that 11 companies were on the final shortlist.

The five companies dropped from the final list were Chuo Mitsui Asset Management, T&D Asset Management, Neuberger Berman, BNY Mellon (BK.N) and BNP Paribas Investment Partners.

The public fund became a net seller of its assets for the first time in the financial year that ended in March 2010 as it started to pay out more in benefits than it received in contributions to the national pension.

It sold a total of 4.77 trillion yen in assets during the financial year ending March 2011. Of that total, it sold 405 billion yen in foreign securities and the rest were in domestic bonds.

The GPIF allocates its funds in four asset classes - foreign equities, domestic equities, foreign bonds and domestic bonds.

The investment in emerging market equities will be allocated from the foreign equities portfolio, which had an asset size of around 10.9 trillion yen ($137.2 billion), or about 10 percent of the total portfolio, as at December 2011.

Officials at the GPIF said the public fund's investment in emerging markets would be small to start with, but declined to give a specific figure.

The MSCI Emerging index would be used as a benchmark, the fund said.

The pension fund makes allocations in line with its model portfolio, which gives a weighting of 11 percent to domestic stocks, 67 percent to domestic bonds, 9 percent to foreign stocks, 8 percent to foreign bonds and 5 percent to short-term assets.

($1 = 79.7900 Japanese yen)

Reporting by Chikafumi Hodo; Editing by Jacqueline Wong and Richard Pullin

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