Japan Public Pension Mulls Shift in Stock Ownership
Japan's public pension fund - a pool of over $1 trillion - is considering a change to its portfolio strategy that could allow its investment in domestic stocks to grow with a rallying market, according to people familiar with the deliberations.
The changes, yet to be finalized, would mark the most significant revision in investment strategy for the world's largest pension fund since 2006 and highlight the game-changing economic policies of Prime Minister Shinzo Abe.
Without the shift, the Government Pension Investment Fund (GPIF) could be forced to buy Japanese government bonds, already the biggest part of its portfolio by far, in a weakening and more volatile market. It could also have to sell Japanese stocks in an equity market that has rallied more than 60 percent since November even after the recent sell-off.
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The main idea under consideration would be for the pension fund to change the way it assesses the potential risk and return on assets to allow it more flexibility, the sources said. GPIF would keep its model portfolio, which sets a broad framework on how much money is allocated to different assets, unchanged.
The sources, who declined to be identified because they were not authorized to discuss the pending changes, said the fund is expected to announce the changes as soon as next month.
An official at GPIF declined to comment on the matter.
Abe's economic policies, dubbed Abenomics, are aimed at reviving the economy with 2 percent inflation, more consumer spending and corporate investment.
Tokyo stocks have rallied since Abe began pushing his policies ahead of his December election victory. At the same time, the yield on the 10-year Japanese government bond has risen to near 1 percent, ending a rally in the government debt market that began in 2006.
Those developments have created a problem for GPIF, according to the people familiar with fund's deliberations.
The fund's exposure to domestic bonds has dropped to near the bottom of the allowable limit under its established portfolio. At the same time, the allocations for overseas and domestic equities have neared their maximum limits.
So without changes, the fund would be forced to buy weakening bonds and sell rising stocks. GPIF has not detailed its current risk and return profile, but fund management have used such projections as a benchmark to ensure that the public fund is not overexposed to riskier and more volatile assets.
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GPIF manages a $1.1-trillion dollar portfolio equivalent to the size of the annual economic output of Mexico from a non-descript brown skyscraper in Tokyo's Kasumigaseki district. The fund, which is responsible for the retirement savings of Japanese government employees, has relied on a portfolio model that includes a 67 percent allocation for domestic bonds.
Its investment model went unchanged through the global financial crisis of 2008 and served the fund well through the years of slow growth in Japan since.
For the six years through March 2012, the pension fund's investment in yen bonds had returned 2.28 percent. By contrast, domestic stocks lost 9.43 percent over the same period.
A committee of 10 outside advisers that serve as the fund's investment committee have been reviewing GPIF's strategy. The committee has met three times since April.
GPIF Chairman Takahiro Mitani told Reuters in February that the public pension would review its long-term investment target and portfolio model, in part because it had already come under scrutiny by another public agency.
In October 2012, a report by Japan's Board of Audit had called on the pension fund to consider such a review. The board's 120-page report, which was commissioned by the then-ruling Democratic Party, questioned whether the GPIF portfolio targets remained relevant and whether they should be changed to better reflect considerations of investment risk.
The fund's long-term investment targets, reviewed every five years, must be approved by the health minister. The next review of that target is scheduled to start from next financial year in April 2014.
But GPIF is also allowed to change its investment targets during times of extraordinary market developments. The public fund reviewed its portfolio after the Lehman crisis in 2008 and the March 2011 earthquake and tsunami, but elected on both occasions to keep its targets unchanged.
But the sharp moves in financial markets over the past six months and the critical review by auditors have made fund administrators more serious about considering changes now, people familiar with the matter said.
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The fund's model portfolio sets a core allocation of 67 percent for bonds, 11 percent for domestic stocks, 9 percent for foreign stocks and 8 percent for foreign bonds. The fund is allowed to keep allocations within a percentage range centered on those targets.
By the end of December, the fund was about 60 percent invested in domestic bonds, approaching its 59-percent minimum limit.
At the other extreme, it had about 13 percent in foreign equities, close to its allocation ceiling of 14 percent. GPIF had about 13 percent in Japanese equities in December compared to a ceiling of 17 percent.
The yield on the benchmark 10-year Japanese government bond was 0.9 percent on Thursday, compared with a dividend yield of almost 1.7 percent for the Topix.
GPIF is set to announce results for the January-March quarter in late June or early July.