World's Biggest Pension Fund Is Moving Into Junk and Emerging Bonds

Japan’s $1.2 trillion Government Pension Investment Fund, the world’s largest, unveiled sweeping changes to its foreign bond investments, hiring more than a dozen new asset managers and creating mandates for junk and emerging-market securities.

The fund picked managers for eight categories of active investments in overseas debt, it said Thursday. GPIF chose Nomura Asset Management Co. to oversee U.S high-yield bonds and UBS Global Asset Management (Japan) Ltd. for European speculative-grade debt. Janus Capital Management will handle part of the pension giant’s U.S. bond investments as a subcontractor for Diam Co., according to GPIF’s statement, which didn’t specify whether the money would go to Bill Gross’s fund. Ashmore Japan Co., a specialist in developing-country investment, won the only local-currency emerging-market contract.

GPIF faces mounting pressure to boost returns and diversify assets as pension payouts for the world’s oldest population swell. The fund has pared domestic bonds in the past year in favor of equities, inflation-linked debt and alternative assets. Its foray into high-yield bonds comes as the securities hand investors the biggest losses in four years.

“I’m worried," said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “The timing isn’t good. We’re talking about the Fed raising rates, and the assets that are likely to be affected the most by this are junk bonds. Investing in emerging-market currencies is worrying, too."

Bond Losses

A gauge of global speculative-grade debt compiled by Bank of America Merrill Lynch dropped for a fourth month in September, the longest stretch since the data began in 1998. This year is shaping up as one to forget for investors in risky assets, with stocks, commodities and currency funds all in the red amid concern about the outlook for the global economy and as the Federal Reserve prepares to raise interest rates. Investors pulled $40 billion out of emerging markets in the third quarter, fleeing at the fastest pace since the height of the global financial crisis.

GPIF picked 27 managers, 21 for active and six for passive investments, according to its statement. All active managers will be compensated based on their performance, it said. Tokio Marine Asset Management Co. and Northern Trust Global Investments Japan KK were among companies that lost mandates in the reshuffle. The fund added BNP Paribas Investment Partners Japan Ltd. to oversee inflation-linked bonds.

GPIF expects yields of 5 percent or more from bonds rated BB or lower, the Nikkei newspaper reported. Japan’s 10-year sovereign bonds yield 0.345 percent. The yen weakened as much as 0.3 percent after the pension fund’s announcement Thursday.

Asset Allocations

The pension manager held about 13 percent of its 141 trillion yen ($1.2 trillion) portfolio in international bonds as of the end of June, up from about 11 percent a year earlier. It targets 15 percent for the asset. Domestic bonds made up 38 percent of its portfolio, local stocks accounted for 23 percent and foreign equities were at 22 percent as of June 30.

Investors in global junk debt lost 4.5 percent last quarter, the most since the three months ended September 2011, the Merrill Lynch data show. The bonds returned 161 percent from the start of 2009 through May this year.

“It seems like GPIF has become more short-sighted," said Fujiwara. “Instead of chasing higher returns, it should be reviewing pension payouts.”

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