Japan’s GPIF Should Own $600 Billion of Stocks, Ito SaysAnna Kitanaka and Shigeki Nozawa
The world’s biggest retirement fund should put half its $1.2 trillion of assets in stocks and increase its yearly return goal to 5 percent, said the head of a panel that advised lawmakers on overhauling public pensions.
Japan’s Government Pension Investment Fund should reduce its bond holdings to about 40 percent within two years, Takatoshi Ito said in a Feb. 14 interview in Tokyo. The fund had a combined 68 percent of its assets in domestic and foreign debt as of Sept. 30. GPIF needs to raise the annual return it seeks, currently 4.1 percent, to fund retirement payouts for the world’s oldest population, Ito said.
“All big pension funds start out in bonds and move over time into stocks and alternative assets, but GPIF is about 20 years behind its global peers in this process,” said Ito, who is dean of the University of Tokyo’s graduate school of public policy. “They should aim for returns like those of foreign pension funds. That’s about 5 percent, over 10 years.”
GPIF, led by Takahiro Mitani, is under pressure to sell some of its holdings of the world’s lowest-yielding sovereign debt to buy investments that may provide higher returns. Lawmakers should pass a bill by June to give GPIF autonomy from the health ministry so the fund can change its investment strategy, Yasuhisa Shiozaki, the ruling Liberal Democratic Party’s deputy policy chief, said in an interview on Jan. 21.
Demands backed by Prime Minister Shinzo Abe for GPIF to rebalance its bond-heavy portfolio are unfair given the institution has been independent of the government since 2006, Mitani said in an interview with the Financial Times newspaper reported today. GPIF’s purpose is not to buoy the stock market and Ito “lacks understanding of the practical issues of this portfolio,” the newspaper cited Mitani as saying.
GPIF owned 71.9 trillion yen ($707.8 billion) of domestic bonds as of Sept. 30, making up 58 percent of its 124 trillion yen of assets, according to its most recent quarterly report. Japanese sovereign debt returned 2.8 percent in the 12 months through last week, a gauge compiled by Bloomberg shows, compared with 26 percent for the Topix index, including reinvested dividends. The Topix climbed 0.7 percent today.
GPIF’s stock portfolio should be evenly split between local and foreign equities and the fund should take a long-term approach to investment, Ito said. Local shares accounted for 16 percent of GPIF’s assets as of Sept. 30, followed by 13 percent in overseas equities, 10 percent in foreign bonds and 2.1 percent in short-term assets.
In the past, “politicians would say GPIF should get rid of all its stock holdings when shares fell, and when they rose and returns from bonds dropped, they’d say buy more stocks, leading them to sell at lows and buy at highs,” Ito said. “This is stupid. As an investment strategy, there’s no way you can make a profit from this. That’s what happens if you leave things to short-sighted politicians, and that’s why it’s important to gain independence from them.”
Ito’s panel in November said GPIF should consider investing more in overseas assets, private equity, commodities, infrastructure and real-estate investment trusts, to help cover rising retirement payouts as the world’s oldest population ages.
“We are seriously taking on board the pension panel’s recommendation that a review of a domestic bond-focused portfolio is necessary,” Naoki Katagiri, a spokesman at GPIF, said by phone today. “We aim to consider making changes as fast as possible following things such as the pension financial review.”
The health ministry’s review of pension funds, which takes place every five years, is due this year. It will set new targets for GPIF based on its outlook for returns needed over the next 100 years to fund payouts.
The review should remove language from the 2009 report that said GPIF should target a 4.1 percent return while investing in “safe” assets, which GPIF took to mean bonds, Ito said last week.
“Investing only in bonds is generally viewed as reducing risk, but focusing on one asset and not diversifying is an extremely big investment risk,” a health ministry advisory committee wrote in a discussion paper released Feb. 13. “It’s hard to imagine that deflation and low rates will continue. If prices and wages rise, pension payouts will increase in tandem, but higher rates will lead to a decline in bond prices and a very high risk of losses.”
Japan’s 10-year sovereign bonds yielded 0.59 percent on Feb. 14, the lowest rate in the world. Prices excluding fresh food increased 1.3 percent in December from a year earlier, the statistics bureau said Jan. 31 in Tokyo. The Bank of Japan is buying about 7 trillion yen of bonds a month as it seeks to meet a 2 percent inflation target.
“GPIF should shift the risk of holding domestic bonds to the BOJ while they are buying,” Ito said. “GPIF can make a drastic change in bond holdings within two years and it’ll have a limited market impact because the BOJ will buy them.”
Mitani said in December Japan’s central bank will fail in its inflation goal. Higher yields wouldn’t mean losses as GPIF holds bonds for their entire term, he said. In January, Mitani said the fund won’t add to JGB holdings and may invest in other assets as the debt matures.
GPIF is in “extreme danger” of losing out on the chance for better returns by keeping bonds until maturity, Makoto Utsumi, who helped shape the world’s largest retirement savings pool and is also the president of debt-rating firm Japan Credit Rating Agency Ltd., said this month.
“Holding bonds until maturity while the BOJ continues to intervene in markets means GPIF ends up with a huge amount of low-returning assets,” Utsumi, 79, said. Opportunity cost “is another type of risk. Is it right to settle on such low levels for the public’s pension returns?”
The Topix index of equities surged 51 percent last year, its biggest advance since 1999 and the most among 24 major developed markets, as foreign investors bought the most Japanese equities on record. The measure fell 8.5 percent this year, the biggest drop among its global peers.
“Right now, domestic investors are said to be absent from the share market,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which manages about 11 trillion yen in assets. “If GPIF goes ahead to increase its Japanese stock weighting and other private investors follow, I think that will create synergy for the economy by supporting Abenomics from the market side.”
Japan’s biggest retirement funds grew by an average 0.9 percent in the 10 years through 2013 in local currency terms, the lowest rate among 13 markets tracked by a Towers Watson & Co. global pension study.
The funds also had the heaviest weighting of bonds, comprising 51 percent of their assets last year, according to the report. That compared with a global average of 29 percent, 23 percent in the U.S. and as little as 13 percent in Australia.
“It’s hard for GPIF to achieve returns of 4.1 percent with such a high proportion of holdings in bonds,” Ito said. “The health ministry should say to GPIF, ‘here is your target return, so you have the freedom to take on whatever risk is necessary.’”
Equities made up 40 percent of the Japanese funds’ holdings, compared with a worldwide average of 52 percent, according to Towers Watson.
“The most respected large pensions in the world have over 50 percent of their investments in public equities, private equities, real estate, infrastructure and other alternative asset investments,” Charles Millard, Citigroup Inc.’s New York-based head of pension relations, said by e-mail on Feb. 12. “And they are diversified across the globe rather than over-concentrated in their home country.”
GPIF’s Mitani has argued that Japan’s deflationary environment called for a different investment strategy and the fund’s returns weren’t especially lower than peers once price changes were taken into account.
The November report from Ito’s panel also recommended that the fund be made independent from the Ministry of Health, Labor and Welfare, which oversees GPIF’s budget, investment strategy and hiring.
Changes in the law governing GPIF should be completed as early as the fall of 2014, and enacted by April next year, Ito said last week. The health ministry won’t move quickly to revise the legislation, so efforts are needed to ensure it happens, Kozo Yamamoto, an LDP lawmaker, said in December.
“I think proper diversification, once all legislation and regulations are in place, will take many, many years,” Citigroup’s Millard said. “To diversify the investments of a $1 trillion pension plan is a multi-decade project. But putting that many years into this effort is worth it, as the liabilities of GPIF go on for decades as well.”