(Bloomberg) — The world’s biggest pension fund posted a record return for the fiscal year ended March, boosting its assets to a new high and beating its benchmark for the first time in seven years.

Japan’s Government Pension Investment Fund booked a gain on its investments of 25%, or 37.8 trillion yen ($339 billion), in the 12 months ended March, the most since the fund started managing the nation’s pension reserves in 2001.

Overseas stocks were its best-performing asset in the period, returning 59.4%, followed by a 41.6% return in domestic stocks. Overseas debt gained 7.1%, while Japanese debt lost 0.7%. The fund’s return exceeded its compound benchmark by 0.3%.

Speaking in Tokyo, GPIF President Masataka Miyazono said the return was “historically, especially high,” though he cautioned the markets had seen a “tailwind” from the boom in equities throughout the year, and that future years would see headwinds too. He didn’t expect such a one-sided return on stocks this fiscal year, he added.

Miyazono has yet to oversee a negative quarter since he took the top post in April 2020, as the fund extended its recovery from a record 17.7 trillion yen loss during the first three months of last year due to the global equity rout. The fourth straight quarter of gains lifted the fund’s assets to a record 186.1 trillion yen.

The MSCI World Index rallied 52% during the fiscal year ended March, while Japan’s benchmark Topix index rebounded 39%. Yields on 10-year Treasuries climbed 107 basis points to 1.74% and those of Japanese government debt added about 12 basis points to 0.12%. The dollar strengthened almost 3% against the yen during the fiscal year.

ESG Boost

Investments in ESG indexes reached a record high of 10.6 trillion yen as of the end of March, rising 86% from the previous year. The fund added two new foreign equity ESG indexes last December. GPIF also had 1.1 trillion yen invested in green, sustainability and social bonds in the same period, after forming several partnerships last year to promote such debt.

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The GPIF has been seen as a leader in socially responsible investing under former chief investment officer Hiromichi Mizuno, but since his departure the fund has been noticeably less vocal on the subject. Asked about the near-doubling of ESG assets, Miyazono reiterated the fund’s position of investing in ESG primarily for its returns, and declined to say how much it would invest in future.

“We’re not going to rapidly increase our position, and nor are we going to be extremely cautious,” he said. “We invest over the long term, and I think you’ll see an impact over the long term.”

Eiji Hirano, the former chairman of the board of governors, told Bloomberg News recently he saw signs of an ESG “bubble,” and said the fund needed to evaluate how much socially responsible investing really adds to returns. The GPIF plans to issue its annual report on ESG activity later this summer, Miyazono said.

“It’s likely this number will continue to increase,” Naoki Fujiwara, chief fund manager at Shinkin Asset Management, said of the jump in ESG investments. “It seems that expectations for ESG are continuing to rise in Japan’s stock market as well. It’s not just pension funds, but money from institutional investors and investment trusts that’s also flowing into these names, creating a premium.”

China Bonds

With FTSE Russell set to add Chinese debt to its benchmark global bond index from October, the fund may soon have to choose whether to put its money into China’s sovereign debt, or risk lower returns elsewhere. Miyazono acknowledged the need to consider the asset as an option, but said the fund needed to be cautious.

“it is necessary to consider investing in Chinese bonds, when taking into consideration the returns,” he said. “That said, there are market regulations for these bonds, especially against foreign investors. We manage a large amount of money, and given the amount of exposure we have, we do have to tread carefully.”

World’s Top Pension Fund Faces Moment of Truth on China Debt

For the three months ended March, the fund returned 5.7%, or 10 trillion yen. Japanese stocks returned 9.3% during the period, during which the Nikkei 225 briefly topped 30,000 for the first time in more than 30 years. Foreign stocks returned 12%, while domestic and foreign debt lost 0.4% and returned 1.6%, respectively.

“Given the market changes seen in fiscal 2020, there were many opportunities to review asset ratios, giving GPIF a lot of positive experiences in managing based on the basic portfolio,” wrote Eiji Ueda, the fund’s chief investment officer, in a statement.

(Updates with details starting from eighth paragraph)

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