Japan Pension Fund Urged to Take More Risk, Review Bonds

Japan Pension Fund Urged to Take More Risk, Review Bonds

Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, should become more independent of the government and review its domestic bond holdings, an advisory panel said. GPIF should allocate more of its 121 trillion yen ($1.21 trillion) portfolio to overseas assets and consider investing in real-estate investment trusts and private equity where returns may be higher than Japanese government bonds, the panel said in a report today. The fund should change its organizational structure, while the government should recognize GPIF’s independence, the report said.“An independent government pension fund means more assertive asset managers, and by definition that will probably mean greater allocation to equities and overseas assets,” 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.”

GPIF should consider investing in REITs, private equity, commodities and infrastructure, the panel said today. The fund’s allocation to domestic bonds is too high and it should calculate investment risk based on an inflation scenario of 2 percent, Takatoshi Ito, the panel’s chair, told reporters. . The fund 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.

Inflation Doubt

The fund needs to reduce the risk of losses on its bond holdings should interest rates start to rise as Japan’s economy improves, Ito said in an Oct. 4 interview. 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 0.62 percent yesterday, the lowest rate in the world.

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 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 today. “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 said in a press briefing today. They should be set up within a year, he said.

Current Allocations

GPIF should consider passive investment based on the JPX-Nikkei Index 400, which starts next year and focuses on return on equity, the panel said in its report. 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. The fund’s budget is currently controlled by the Health Ministry, which also approves its investment decisions. Legislation to change that could be written by the spring of 2015, Ito told reporters.

Staff could be added and expenses increased without requiring a law change, Ito told press today. 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.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Anna Kitanaka in Tokyo at akitanaka@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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