Friday, March 1, 2013

World's Largest Pension to Review Portfolio?

Eleanor Warnock of the Wall Street Journal reports, World's Largest Pension to Review Portfolio:
Japan's public pension fund will be reviewing its portfolio when its new fiscal year starts in April, an official said Friday, helping stoke market interest in how the country's pension funds respond to rising share prices and a weakening yen.

The Government Pension Investment Fund, the world's largest, is responsible for Japan's employee pension insurance and national pension plans, which together cover more than 60 million people. In dollar terms, its assets under management exceed Mexico's gross domestic product, World Bank statistics show.

Coming during a share rally fueled by mostly foreign investors, asset managers and strategists say, a change in the portfolios of Japan's notoriously conservative funds—heavy in domestic bonds—could be the start of a significant positive turn for Japanese markets.

"Periodically we must inspect" our portfolio, Masahiro Ooe, director general of the fund's planning department, told reporters in Tokyo. "Once we get into the next fiscal year, I want to proceed with this work as soon as possible."

While Mr. Ooe declined to give any details, his remarks suggest the giant fund may have taken notice of the recent stock rally, even as Japanese government bond yields sink yet lower.

Rising share prices and a weaker yen—which boosted returns from foreign-currency denominated assets when expressed in in yen—helped improve the fund's October-December investment profit to ¥5.14 trillion ($55.5 billion), or 4.8% on its ¥111.93 trillion total asset holdings. That compares with a profit of ¥528.7 billion in the previous quarter.

Domestic shares returned 16.7%, good for a ¥2.07 trillion profit, while domestic bonds—60% of the portfolio—logged a negative return of 0.06%, the only asset class that did not contribute to the gain. Foreign stocks marked a 13.8% gain and foreign bonds 13.6%.

Amid signs of a pickup in global growth and an easing of concern about Europe's sovereign-debt crisis, the Nikkei Stock Average gained 17% in the October-December quarter. The Dow Jones Industrial Average declined 2.5%.

Stocks currently account for a far smaller portion of the portfolios of Japanese pension funds than of their peers in the U.S. or U.K.—35%, according to a January report by consultancy Towers Watson, versus 52% and 45%, respectively. Only about 26% of the GPIF portfolio is domestic and foreign shares.

I've already covered Japan's Great Rotation as well as the seismic shift in that country as they struggle with persistent deflation.

Yesterday, Japanese Prime Minister Shinzo Abe nominated Asian Development Bank President Haruhiko Kuroda to lead the nation’s central bank, raising the likelihood of further monetary stimulus this year.

But skeptics abound. Henry Sender of the Financial Times notes that 'Abenomics'  is not enough to rescue Japan. That remains to be seen. One thing is for sure, Abenomics has revived top global macro funds, many of which were struggling to bring home the bacon in the last couple of years.

And as Chikafumi Hodo of Reuters reports, "Abenomics" boosts returns at Japan's huge public pension fund:
Japan's public pension fund, the world's largest, recorded investment gains of $56 billion in October-December, its second best quarter on record, on the back of strong domestic equities, while the yen's fall helped boost the performance of foreign assets.

The fund's performance was helped largely by Prime Minister Shinzo Abe's aggressive reflationary fiscal and monetary policies, which triggered the yen's fall and lifted the broad Topix stock index .TOPX by almost 17 percent over the three month period.

Global asset managers and market dealers closely watch the performance of the Government Pension Investment Fund (GPIF) due to the size of its portfolio - which is larger than the economy of Mexico, the world's 14th biggest.

The GPIF recorded an investment gain of 5.14 trillion yen ($55.71 billion) in October-December, significantly higher than the previous quarter's 484 billion yen gain. That translates into a positive return of 4.83 percent, versus 0.49 percent in July-September.

The fund, which started operations in 2001, had its best quarter a year ago, in January-March 2012, posting an investment gain of 5.48 trillion yen and a positive return of 5.11 percent.

The fund's total asset size rose 4 percent to 111.9 trillion yen ($1.21 trillion) as of end-December from 107.7 trillion yen in September.

The biggest investment gains were in domestic stocks - up 2.07 trillion yen for the fund's best quarter since January-March last year. The performance in Japanese stocks translates into a positive return of 16.71 percent. The benchmark Topix index, including dividends, rose 16.73 percent.

The GPIF had a positive return of 13.62 percent from foreign bonds and 13.78 percent from foreign equities.

However, returns on domestic bonds slipped 0.06 percent - an investment loss of 35.4 billion yen - for the first quarter since January-March 2011.


The sharp recovery in domestic shares and the weaker yen may give the GPIF a headache as it may need to reallocate its huge portfolio - its weighting of foreign equities is near the allowed ceiling, while its weighting of domestic bonds has slipped to near its minimum limit.

By end-December, the fund was about 60 percent invested in domestic bonds, approaching the minimum 59 percent limit. It had about 13 percent in foreign equities, close to its allocation ceiling of 14 percent.

The GPIF allocates its investments based on its model core portfolio with a 67 percent allocation to domestic bonds, 11 percent to domestic stocks, 9 percent to foreign stocks and 8 percent to foreign bonds. The allocation range for domestic bonds is 59-75 percent, and 4-14 percent for foreign equities.

Chairman Takahiro Mitani told Reuters last month the fund will review its long-term investment target and portfolio allocation model around April, adding that review should include a discussion on the investment strategy towards Japanese government bonds.

Yields on 10-year JGBs were around decade lows of 0.640 percent on Friday.

Last year, a report by Japan's Board of Audit, requested by the upper house of the national assembly, called for the GPIF to consider reviewing its target and allocations.
Interestingly, Dominic Lau of Reuters reports, Long-dated JGB prices rise on pension fund buying:
Long-dated Japanese government prices inched higher on Friday, with the 30-year yield hitting a seven-month low, as pension funds looked to extend the duration of their portfolios.

Expectations that the Bank of Japan will adopt bold monetary easing also supported the market, although gains were capped after Tokyo's Nikkei share average reversed earlier losses and traded higher.

The 30-year yield slipped 4.5 basis points to 1.765 percent after dropping at one point to 1.750 percent, a seven-month low. The 30-year yield has shed 14.5 basis points this week, its biggest weekly decline since December 2008.

The 20-year yield eased 3 basis points to 1.575 percent, falling for an eight straight session and after touching a seven-month trough of 1.555 percent.

"It's more related to the extension trade by pension funds who need to extend the asset side duration by buying long-end of the curve to match the underlying index," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Another factor pushing the yields down is expectations of aggressive easing by the new BOJ chief," she said.

Prime Minister Shinzo Abe on Thursday nominated Asian Development Bank President Haruhiko Kuroda to be BOJ governor after current chief Masaaki Shirakawa steps down on March 19, and tapped academic Kikuo Iwata and BOJ official Hiroshi Nakaso as deputy governors.

The 10-year yield inched down 0.5 basis point to 0.655 percent by mid-afternoon after falling to 0.640 percent, a fresh nearly 10-year low.

With the super-long sectors outperforming, the spread between 10- and 30-year bonds narrowed to 111 basis points to its lowest level since late September.

Ten-year JGB futures added 3 ticks to 144.05 after hitting a two-month peak of 145.21 to within striking distance of a record high of 145.26.

Muguruma said the 10-year yield was likely to trade between 0.600 and 0.700 percent in the near-term as investors were likely to want to see what policy the new BOJ chief would adopt in whipping deflation.

Jiji news reported on Thursday that Kuroda's confirmation hearing would be on March 4, with the two nominees for the deputy positions to appear before lawmakers the following day.
As I stated, there are deep structural factors that explain Japan's long struggle with deflation. An aging population is the biggest factor as the country races to defuse its pension time bomb.

How will Abenomics play out? What will be the response from other developed economies struggling with low growth and their own pension time bomb? I don't know. Think talk of a currency war is way overblown but when policymakers struggle to reignite growth, they often choose what seems like the easy way out, eschewing much harder choices.

One thing is for sure, Japan's sleeping giant is awakening and global asset allocators are paying close attention. Japanese corporate pension plans heavily invested in JGBs are also paying close attention as they need to review their portfolios as well.

Below, Bloomberg's Susan Li reports on yesterday's top stories stating that Japan has overtaken China as the largest holder of US debt. And Adam Posen, president of the Peterson Institute for International Economics, discusses Bank of Japan monetary policy. He speaks on Bloomberg Television's "On The Move Asia."