The first flurry of full-year returns results for sovereign wealth funds and public pension funds shows a large spread of results, but is broadly in line with year-end estimates in Global SWF’s 2023 Annual Report.

Returns vary from -16.9% from Chile’s PRF at the bottom end to -3.7% for Australia’s Future Fund and Japan’s Government Pension Investment Fund (GPIF) over the 11 reporting funds, with an average of -8.4%. This compares with Global SWF’s estimate of a 6.5% decline in AUM across the universe of 400 state-owned investors based on market indices, geographic exposures, and alpha.

Battle of the Giants: Japan and Norway Diverge

Japan’s Goliath US$1.44 trillion GPIF has racked up an impressive performance in the face of major challenges, thanks to yen depreciation, a high allocation to fixed income and the Tosho’s relatively benign performance. The fund, which allocates 50.6% of AUM to bonds and 49.3% to equities, outperformed all its peers. Most notably, it beat the return of the world’s other big state-owned investor, Norway’s US$1.18 trillion NBIM, which returned -14.1% - one of the worst performers in the small selection.

While highly liquid like GPIF, NBIM allocates 70.0% of AUM to equities and 27.4% to fixed income with the rest in unlisted real estate and renewable energy. With a bar on domestic investments, NBIM’s performance is highly dependent on foreign public markets. In contrast, GPIF’s equities are evenly allocated to domestic and foreign markets with around 24-25% of AUM in each and its higher allocation to fixed income gave it the edge in a volatile market.

Exchange rates played a significant role in damping the effects of the global bear market on fund performance, in local currency terms. The slump in the value of the Japanese yen, which fell 13.8% in 2022, helped offset the effects of a 6.1% decline in the MSCI ACWI Ex Japan index, which GPIF uses as its benchmark for foreign equities. At the same time, Japan’s public equity market did not witness the massive rout in value seen elsewhere in the world with the Nikkei-225 down 9.4% and TOPIX down 5.0% over 2022.

As in the case of GPIF, depreciation ended up rescuing NBIM from a far worse result. In 2022, NBIM reported a total NOK642 billion forex gain as well as a NOK1.09 billion oil revenue inflow due to the impact of soaring Brent crude prices, which together offset the NOK1.64 trillion loss from negative return.

While GPIF may have beaten NBIM in year-to-date returns, long-term performance is crucial - and in this respect, the Norwegians beat the Japanese. GPIF’s annual average gross return from inception in 2006 is 3.7%, while NBIM reports a more robust 5.6% since 1998 even though the krone has remained stronger than the yen over the long-term – reflecting the long-term superior performance of public equities over fixed income.

Down South: Private Markets Buffered Equities Slump

Antipodean funds performed better than benchmarks with Future Fund the clear leader with -3.7%, followed by AustralianSuper (-4.8%) and NZ Super (-6.1%). The situation was a vast turnaround from FY2021 when NZ Super notched up its best-ever return of 29.6% due to a leap in the value of public equities, beating its benchmark by 1.7% and surpassing the performance of AustralianSuper (20.4% on the balanced fund) and the Future Fund (22.2%). NZ Super’s more volatile performance is largely due to a high proportion of public equities in the portfolio with alternatives – which helped cushion the blow on public markets in other funds – at around 20%.

Global SWF analysis finds a moderate 0.51 correlation coefficient between returns and alternative asset allocation, indicating that in many cases private markets can be a buffer to turbulent public markets.

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