Japan Pension Fund Urged to Diversify as Independent Body

Japan’s 121 trillion yen ($1.21 trillion) pension fund needs more independence from bureaucrats and should put some of the world’s biggest retirement savings pool into private equity and commodities, an expert panel said.

The Government Pension Investment Fund should review domestic bond holdings and consider investing more in overseas assets, according to a report released by the advisory group yesterday. The fund should also look at diversifying into private equity, commodities and real-estate investment trusts, where returns may be higher than on local sovereign bonds, the panel said.

“An independent government pension fund means more assertive asset managers,” said Mark Matthews, Singapore-based head of Asia research for Bank Julius Baer & Co. Many countries have quasi-independent national pension funds as “they want the people running them to make professional investment decisions, not political ones,” he said.

GPIF is under pressure to cover payouts as the world’s oldest population ages, with baby boomers born in the wake of World War II beginning to reach 65 and become eligible for pensions. The fund’s allocation to domestic bonds is too high and it should calculate investment risk based on inflation of 2 percent, Takatoshi Ito, the panel’s chairman, told reporters yesterday.

Amari Reaction

GPIF should also consider investing in infrastructure, the panel said. Ito yesterday delivered the panel’s report to Economy Minister Akira Amari, who said he will work toward realizing its proposals.

The yen pared earlier gains after the report, dropping by 0.29 per dollar within 15 minutes of the announcement. Japan’s currency weakened 0.3 percent today to 100.37 per dollar as of 11:40 a.m. in Tokyo. The Topix index gained 0.9 percent.

Takahiro Mitani, GPIF’s president, has expressed doubt that the Bank of Japan can achieve its 2 percent inflation goal, saying in June that the fund plans to hold 60 percent of its assets in local bonds until at least 2015. The nation’s sovereign debt due in 10 years yielded 0.61 percent yesterday, the lowest rate in the world.

Ito believes Prime Minister Shinzo Abe will succeed with his reflation policy, according to Jonathan Allum, London-based strategist at SMBC Nikko Capital Markets Ltd.

“Ito is clearly Abe’s man,” Allum said in an e-mail. “The assumption is that Abenomics will succeed and that Japan is already in a post-deflationary world, which requires a post-deflationary investment strategy from the GPIF.”

Baby Funds

The fund should study the possibility of spinning off part of its assets into so-called baby funds, or specialized investment pools, according to the panel’s report.

“It’s a good idea to invest a small portion in REITs and alternative assets, but if they invest on a large scale, they’ll end up pushing up the prices of the assets they’re looking to buy,” Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., said by phone yesterday. “They are a big whale. The market is very small, and if a big whale jumps in, it’s going to overflow.”

The baby funds will be small and won’t disrupt the market much, Ito told reporters yesterday. They should be set up within a year, he said.

‘Growing Possibility’

GPIF may prefer holding REITs through baby funds because Japan’s market for such securities is limited in size, analyst Tomohiro Araki at Nomura Holdings Inc. wrote in a report. Such investments would help boost land values in Japan, Araki wrote.

The panel’s recommendations are in line with other global pension funds that tend to add risk with alternative investments rather than increasing equity weightings, SMBC Nikko’s Allum said.

GPIF should consider passive investing based on the JPX-Nikkei Index 400, which starts next year and focuses on return on equity, the panel recommended. As a safeguard against rising prices, the fund should also look at investing in inflation-linked Japanese government debt, according to the report.

GPIF announced in June a cut to its target holding for domestic bonds to 60 percent from 67 percent, while the proportions of foreign and local shares were changed to 12 percent each, from 9 percent and 11 percent, respectively.

The advisory panel, which held the first of eight meetings in July, was tasked with analyzing the management of public and quasi-public pension funds.

Retirement Savings

While Japan’s pool of retirement savings outstrips that of any other nation, it’s not growing fast enough. The nation’s 2010 population of 127 million was the world’s oldest and will shrink 17 percent by 2055, the fastest decline among developed economies, according to United Nations data.

GPIF posted its smallest gain in three quarters in the period ended in June on record domestic-debt losses. Japanese government bonds handed investors a total return of 2.5 percent this year, according to an index compiled by Bloomberg. The Topix index of stocks surged 43 percent.

“They really must increase investment returns,” said Gentoku Kiyokawa, Tokyo-based head of the Japanese investment management department at BNP Paribas Investment Partners SA.

A new law should be established to give GPIF greater independence, the panel said yesterday. The fund’s budget is currently controlled by the Health Ministry, which also approves investment decisions. Legislation to change that could be written by the spring of 2015, Ito told reporters.

More Staff

Staff could be added and expenses increased without requiring a law change, Ito said. It’s natural for pension funds to add experts from the private sector, he said.

“It will be good if they hire people from outside,” said Kazuyuki Terao, Tokyo-based chief investment officer of Allianz Global Investors Japan Co. “What they do in terms of ensuring accountability for performance is important.”

For Ito, the panel’s report is unprecedented and comes at a turning point for the Japanese economy.

“We’ve never seen proposals like this before,” he said. “The environment is changing now. All the panel’s experts share an awareness that it’s dangerous to keep on shaping the fund’s portfolio based on the risk and return assumptions that have been used to date.”