The world’s largest pension fund is seeking external managers for its holdings of bonds outside Japan, including for active investment in inflation-linked, high-yield and emerging-market debt.
The 128.6 trillion yen ($1.26 trillion) Government Pension Investment Fund is taking applications from investment managers with existing pension portfolios of at least 100 billion yen, it said today on its website. GPIF held 11 percent of its assets, or 13.6 trillion yen, in foreign bonds as of Dec. 31. The offshore debt returned 8.2 percent in the December quarter, compared to 0.2 percent on the fund’s Japanese government bonds.
“The foreign debt and overseas currency portion of assets will be in countries that have higher growth than Japan, so the expected return will of course be higher,” Shogo Fujita, chief Japan bond strategist at Bank of America Corp.’s Merrill Lynch Japan Securities Co. unit in Tokyo, said by phone. “I think GPIF may increase its foreign bond allocation to between 15 percent and 20 percent, probably over five to ten years.”
GPIF faces mounting pressure to boost returns, increase active management and diversify its assets as pension payouts for the world’s oldest population swell. The fund is being urged to reduce its dependence on JGBs as Prime Minister Shinzo Abe and the Bank of Japan seek to spur consumer price gains that would erode the debt’s value.
“They’re doing as much as they can to diversify, and they’re aiming for returns that are closer to the foreign investment managers,” said Makoto Yamashita, the chief Japan rates strategist at Deutsche Bank AG’s brokerage unit in Tokyo. “From a risk-return perspective, I think it’s part of a larger plan to increase returns even if they have to take on more risk.”
GPIF will start investing in domestic inflation-linked bonds this month, the health ministry, which oversees GPIF, said in December.
The retirement fund will continue to use the Citigroup World Government Bond Index excluding Japan as a benchmark for its passive investment strategy and the Citigroup World Big Bond Index for active management, it said today. They are based in yen and unhedged, it said.
For the emerging, high-yield and inflation-linked bonds, GPIF will consider various benchmarks proposed by the managers. While the benchmark will also be yen-based, the fund didn’t specify whether it would be hedged or not.
GPIF held 8.3 trillion yen in passive foreign bond investments as of March last year, while 3.5 trillion yen in such assets was actively managed, according to the most recent figures on its website.
Investment managers including Pacific Investment Management Co. and Goldman Sachs Asset Management Co. were among seven managers of GPIF’s active foreign bond investments as of March 31 last year, according to GPIF’s fiscal year 2012 report. State Street Corp. and Northern Trust Corp. were among six passive foreign bond investment managers, the report shows.