Whale 0, Minnow 1: Tiny Pension Fund Shuns Japan to Top GPIF

  • Okayama-based employee fund beat GPIF six of seven past years
  • Fund’s member firms have little faith in domestic investment

Yoshisuke Kiguchi, who manages a retirement-savings pool less than 1/2 a percent the size of Japan’s giant state pension fund, says he beats the so-called Tokyo whale by avoiding sovereign bonds and putting almost all the money he manages abroad.

Kiguchi’s fund delivered higher returns than the Government Pension Investment Fund in all but one of the past seven years, with average annual gains of 7.6 percent, compared with 5.3 percent for GPIF. While the world’s largest pension fund has strict targets for asset allocations, Kiguchi bases his strategies on avoiding the biggest risks facing markets, and says he anticipated the Bank of Japan’s negative interest rates. He buys a range of assets from mortgage bonds to U.S. distressed property to drug patents.

“The main reason for our outperformance is that we are not investing in bonds,” said Kiguchi, the 51-year-old chief investment officer at the Okayama Metal & Machinery Pension Fund, which manages 48 billion yen ($462 million) of pensions for about 200 small- and medium-sized companies in western Japan. “Rather than holding low-yielding bonds, we are diversifying to higher-yielding assets.”

GPIF itself has been cutting back on Japanese debt after Prime Minister Shinzo Abe urged it to buy more local and foreign stocks, seeking to boost returns to meet the needs of Japan’s growing army of retirees and to spur a greater appetite for risk across Asia’s second-largest economy. While the shift in its allocations initially led to an increase in profits, in August the fund reported a $52 billion loss for the second quarter. That almost equaled its loss for the fiscal year to March 31, its worst annual performance since the global financial crisis.

Kiguchi took over as the Okayama fund’s CIO in January 2009 after working for Russell Investments from 1998 to 2008. He worked at Sumitomo Life Insurance Co. for a decade before joining Russell. The smaller size of the fund, and export-oriented nature of many of its member companies, also allows him Kiguchi more nimble than the government pension behemoth.

The members of the Okayama fund range from companies with as few as three employees to as many as about 800 and include Nakashima Propeller Co., which has more than half the global market for ship screws, and Minoru Industrial Co., an agricultural machinery manufacturer.

“Our member companies are typically not relying on domestic demand and are selling products globally,” he said in a Oct. 6 interview.. “They don’t have any resistance to global investments. Many companies think there is no merit in investing domestically.”

GPIF Allocations

By comparison, GPIF is bound to invest 60 percent of its money at home. It has a 35 percent target allocation for domestic debt, with a 10 percent deviation limit, and a 25 percent weighting for Japanese stocks, with a deviation limit of 9 percent. The fund has a 25 percent goal for foreign equities and a 15 target for overseas bonds.

For a primer on GPIF, click here.

Still, domestic debt was the only asset class to post a profit for GPIF in the June quarter, generating a 1.9 percent return, while domestic stocks slumped 7.4 percent. Government securities slumped 2 percent last quarter, the Bloomberg Japan Sovereign Bond Index shows.

Large pension funds can struggle to match the returns of smaller investors. The California State Teachers’ Retirement System last month said it probably will miss its annual return target of 7.5 percent this year for the third-consecutive time. Calstrs, which had about $192.9 billion in assets as of Aug. 31, returned 1.4 percent in the fiscal year ending June 30 and 4.8 percent in fiscal 2014-2015. It has missed its 7.5 percent target for five of the last 10 fiscal years.

Risk Scenarios

Kiguchi credited his fund’s resilience to investment strategies to minimize the damage should the main risk scenarios for a given year eventuate, rather than utilizing forecasts for stock markets or exchange rates. The aim is to always generate stable returns that won’t be derailed by disruptive moves.

Most of the Okayama investments are in developed countries, with more than 50 percent in the U.S., 30 percent in Europe, 10 percent in emerging countries and about 10 percent in Japan, Kiguchi said. It has a 20 billion yen “low-risk” allocation invested in fixed income assets that have little or no correlation with major indexes. Kiguchi also put about 2 billion yen in long-short emerging bond funds, mainly in Central and South America, and invested a similar amount in a fund specializing in pharmaceutical patent rights.

Avoiding Japan

“Our basic stance is not to invest in countries or regions with low-growth rates, so there is very little domestic investment,” he said.

The fund, which drew up this year’s investment plan in December, anticipated the introduction of negative rates by the Bank of Japan sometime in 2016. It also reviewed its strategy in July on prospects that the BOJ would shift to controlling the yield curve, a move that was made last month. For next year, oil and energy-related investments will be a key focus, as well as the impact on emerging countries from U.S. rate increases, Kiguchi said.

The BOJ has rattled financial markets this year. Its negative rate policy in January spurred declines in banking stocks on concern it was squeezing lender profitability. The BOJ’s presence in local bond and stock markets has swelled as it buys assets to revive inflation. And GPIF has been a major purchaser of Japanese stocks. Japan’s Topix Index fell 0.1 percent as of 11:47 a.m. in Tokyo, and has delivered a 5.3 percent gain since June 30.

“Rather than trying to accurately forecast markets and making bets on that basis, we identify the areas where markets will focus and avoid getting involved,”’ Kiguchi said. “Whether it’s the BOJ or the GPIF, they may buy but they will eventually sell. We want to avoid getting affected.”

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