Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Japan's Government Pension Investment Fund needs to get out more.

The world's second-largest sovereign wealth fund recorded a 5.3 trillion yen ($51.6 billion) loss for the 12 months ended March, the steepest decline in seven years. The main culprit? Its decision to diversify away from now-negative-yielding government bonds into stocks. The strategy backfire has prompted calls for both scrapping the riskier asset class, or giving up the fund's index-based approach.

Neither may yield better results. Stock picking isn't too viable in a $1.3 trillion fund. With so much to invest, analysts will ultimately run out of good suggestions yet still have large amounts in bonds, which considering their huge rally are now in treacherous territory. 

The solution may be simple, and stems from an idea widely studied in academia. By 1952, economist Harry Markowitz had already argued against putting all your eggs in one basket. Splitting the load improves your chances of success. That's what's missing at GPIF. 

Take Canada's Pension Plan Investment Board. The $214 billion fund has shown a cumulative return since 2008 that's more than five times the MSCI World Index, and offered its investors a smoother ride. It posted a 3.4 percent return on investments for the fiscal year ended March net of costs, despite the global equity rout.

Better and Steadier
Canada's pension plan has beaten a broad world stock index, and had smoother returns by diversifying
Source: Bloomberg; Canada Pension Plan Investment Board annual reports
Note: Shows MSCI World Index returns as of Mar. 31 of each year to match the reporting schedule of Canada Pension Plan Investment Board.

Its secret is simple: diversification. GPIF has been branching out -- it lost 9.6 percent on foreign shares and 3.3 percent on overseas debt -- but not enough.

Canada Pension Plan Investment Board is heavily invested in domestic assets, as one would expect of any sovereign wealth fund, however has tempered that by adding private equity, shares of emerging-market companies, real estate and infrastructure. When stocks fell, the higher-risk parts of its portfolio came to the rescue.

Variety Has Value
Diversification has served its purpose for Canada Pension Plan Investment Board
Source: Canada Pension Plan Investment Board annual reports

A look at the historical returns in Canada by asset class should offer GPIF a roadmap: Put more money into private equity, and not just at home, and start wading into emerging markets. Singapore's GIC is another banging the developing-markets drum.

And even though GPIF may be bigger and more cumbersome, it could find that helps in the fight for lower fees and better terms. Regardless, this is one pension whale that needs to swim further afield.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net