GPIF may mull alternative investments

By Chikako Mogi

TOKYO (Reuters) - Japan's conservatively run public pension fund, the world's largest, said it may consider alternative investments, but the sheer size of the $1.4 trillion fund limited its ability to maneuver in smaller markets. "We may consider alternative investments based on whether our risk-return improves by expanding investments to various products, and not because we need such investments when we raise our performance target," Takahiro Kawase, president of the Government Pension Investment Fund, told the Reuters Japan Investment Summit on Wednesday.

"Our asset size is so big that we need to take into consideration how big a market size is, whether our investment is realistic, risk factors, and whether it will lead to a meaningful investment diversification," he said.

The 150 trillion yen ($1.4 trillion) fund currently puts most of its money into Japanese domestic bonds and does not invest in alternative products. Sliding Japanese stock market last year saw it post a negative return on its investments in the fiscal year ending in March.

"With regards to the possibility (of investing in commodities) in the future, I cannot say at this point that there is no possibility," he said.

Kawase said, however, that GPIF needed to take into account elements such as a market's risk-and-return scenario, before deciding to add an asset class to its portfolio.

He said while GPIF needed to start studying the asset class, the commodities market could be too small for it.

Officials in Japan have debated using part of the GPIF's vast funds to form a sovereign wealth fund that could invest more aggressively for higher returns.

The Nikkei business daily reported on Wednesday that Japans' ruling Liberal Democratic Party is set to call for the establishment of a 10 trillion yen ($94 billion) sovereign wealth fund using the GPIF's money.

In the current fiscal year to March 2009, the fund is expected to manage its assets under a model portfolio, where 67 percent will be invested in domestic bonds, 11 percent in domestic stocks, 9 percent in foreign stocks and 8 percent in foreign bonds.

Kawase said the fund's allocations were already more or less in line with the model portfolio.

"Overall, discrepancies are not that big. I don't expect large shifts in allocations," he said, barring high volatility in financial markets.

During the last fiscal year ended in March, GPIF's return on investments fell into negative territory for the first time in five years, as the Japanese stock market tumbled in the wake of financial market turmoil stemming from the subprime crisis.

"We don't invest in subprime-related securitized products, but the sharp fall in Japanese stocks had a big impact," Kawase said.

He said GPIF did not plan to alter asset allocations based on near-term strategies.

The fund measures its performance against a main benchmark index such as the Nomura BPI for domestic bonds, so any change in allocation weighting would accompany changes in these indices, he said.