GPIF Must Cut Japan Stocks, Former Committee Member SaysAnna Kitanaka and Shigeki Nozawa
Japan’s government pension fund should cut domestic stocks to diversify risk, said Seki Obata, who was dropped from the organization’s investment committee last month.
The 128.6 trillion yen ($1.27 trillion) Government Pension Investment Fund owns too many Japanese shares considering the size of the market relative to global equities, said Obata, author of a book on the dangers of reflation policies such as those favored by Prime Minister Shinzo Abe, and one of eight GPIF investment committee members removed in an April revamp. The fund should buy assets such as real estate that offer higher yields instead of seeking capital gains, he said. It held 17 percent of its portfolio in local shares at the end of December.
“GPIF has a global portfolio and needs to diversify its risk,” Obata, an associate professor at Japan’s Keio Business School, said May 2 in Tokyo. “There is obviously a home bias and over-investment in Japanese stocks. They should reduce its allocation as much as possible, to 10 percent at most.”
Obata’s view clashes with analysts and investors predicting Japanese shares will benefit from government plans to alter GPIF’s bond-heavy investment strategy. The Topix index slumped 12 percent this year as foreign investors fled, adding pressure on Abe to prove his policies can spur a sustained economic recovery. GPIF’s sole responsibility is to pension savers, and portfolio changes shouldn’t be aimed at boosting the stock market, Obata said.
GPIF is awaiting the outcome of a five-yearly health ministry review of public pension finances, and government directives that may lay out a different investment approach. Finance Minister Taro Aso said last month that changes will be unveiled in the government’s economic growth strategy in June.
“I completely agree that a reform of GPIF is needed, and think I am one of the strongest proponents for aggressive changes,” Obata said. “But it’s the public’s pension money and needs to be done carefully. After the pension financial review, changes should be discussed over time and finalized by about April. Altering the portfolio in June is wrong -- they’re rushing it.”
The Topix sank 2.6 percent today as the market reopened after a two-day public holiday, its steepest decline in more than seven weeks.
GPIF has been carrying out recommendations of a panel handpicked by Abe, including investing in infrastructure and adopting stock strategies that favor local companies with higher return-on-equity. Members of the Abe-aligned panel were appointed last month to lead GPIF’s investment committee as part of sweeping changes that saw all bar two of the fund’s committee members removed from their posts.
The panel, led by Takatoshi Ito, said last year that GPIF should have fewer bonds, greater asset diversification and more independence from the health ministry as it seeks higher returns in a new inflationary environment.
Obata agrees that GPIF needs to reduce domestic bonds. The fund had 55 percent of its assets in local debt as of Dec. 31. Japan’s 10-year government bond yield of 0.60 percent is the world’s lowest.
While the same argument can be made as for stocks -- that the fund should own a debt portfolio mirroring global bond weightings -- GPIF needs assets that can be easily sold to meet pension payments, so deviating from such a strategy is justified, Obata said.
“There’s no question that the current level is too high,” he said. “The specific weight, I personally believe, should be between the global weight and their current holdings. It’s efficient for a fund to hold their own country’s bonds, which are easy to liquidate.”
Japanese government debt comprises 27 percent of the Bloomberg Global Developed Sovereign Bond Index. The nation’s stocks make up 7.8 percent of the MSCI World Index of developed shares.
Since his four years on the GPIF investment committee ended last month, Obata has become an outspoken critic of proposed moves to reform the fund, including writing a series of blogs about plans he views as misguided.
Obata said he was not outspoken about his opinions regarding cutting Japanese stocks while he was on the committee and does not know why he wasn’t chosen to sit another term.
“The current reform efforts are to prod GPIF into buying shares, so that investors will anticipate this and shares will rise,” Obata wrote in a blog post on May 1. “This means GPIF will be forced to buy stocks at high prices. It’s wrong.”
GPIF should instead move money from local bonds into alternative assets such as real estate and infrastructure, he said last week. The government is underestimating the ability of foreign investors to differentiate between meaningful changes to the fund’s outlook and short-term initiatives to boost the stock market, according to Obata.
“It’s like they are trying to fool a child,” Obata said. “The Abe administration seem to think that they can move foreign investors by using the GPIF story, but they are looking for real change. Many are momentum traders and short-term, and will sell if they don’t see it.”