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GPIF plans infrastructure investment after trimming domestic bond holdings

Bloomberg

The Government Pension Investment Fund, the world’s largest pool of retirement savings, cut domestic bond holdings to the lowest level since the fund’s inception in 2006 and said it will invest in infrastructure.

Japanese bonds accounted for 55 percent of the fund’s portfolio at the end of the quarter ended December, shrinking from 58 percent in the previous period and the smallest share since GPIF was established in its current form in April 2006. The fund will put as much as $2.7 billion into infrastructure over the next five years, it said at a briefing in Tokyo last week. Assets swelled to a record ¥128.6 trillion as of Dec. 31 as the fund earned a 4.7 percent quarterly return, GPIF said in a separate statement.

“It’s a fact that GPIF needs to take risk to some degree in order to raise returns,” said Kenji Shiomura, a Tokyo-based senior strategist at Daiwa Securities Group Inc., Japan’s second-largest brokerage. The infrastructure investment “is a good thing. Shifting from its emphasis on Japanese bonds and diversifying into various assets will reduce risk. I think others will follow GPIF’s move.”

The pension fund is under pressure to overhaul its investment strategy as Prime Minister Shinzo Abe and the Bank of Japan seek to revive the world’s third-biggest economy and exit deflation. GPIF must find a way to manage its money flexibly as well as broaden investments, Abe said to the Diet on Feb. 24. The fund’s basic stance is to diversify its assets, GPIF President Takahiro Mitani said in response.

GPIF will form a partnership with Development Bank of Japan Inc. and Ontario Municipal Employees Retirement System to make the infrastructure investments. Omers returned an average 11 percent annually between 2009 and 2013 through such investments, GPIF said.

The fund may cut its foreign debt holdings to raise the cash for the infrastructure investment, Tokihiko Shimizu, director general for the research department at GPIF, said at Friday’s briefing. Such debt comprised 11 percent of the fund’s holdings as of Dec. 31. It won’t be long until the first investment, Shimizu said, without being more specific.

Investment in infrastructure has the benefit of stable income gains, higher yields than those typically generated from bonds and are less affected by public-market volatility, GPIF said.

GPIF’s domestic bond investments returned 0.2 percent last quarter as its Japanese stocks delivered 9.2 percent, according to the fund’s statement. Foreign debt gave a return of 8.2 percent while overseas equities delivered 16.2 percent.

GPIF held 17 percent of its assets in local shares last quarter, up from 13 percent a year earlier. The quarterly return was the biggest since a 6.9 percent gain in the period ended March 31, 2013. Assets increased from ¥124 trillion as of Sept. 30.

The pension fund’s target allocation to domestic bonds is 60 percent, with asset managers given permission to deviate from this by as much as 8 percent. GPIF’s target for local stocks is 12 percent, with a 6 percent deviation limit. The allocations will probably change in the middle of the year after the health ministry finishes its pension review, Takatoshi Ito, the head of a panel that last year advised the government on the overhaul of public pension funds, said in a Feb. 14 interview.

GPIF should put half its assets in equities and reduce bond holdings to about 40 percent within two years, Ito said. The Health, Labor and Welfare Ministry, which oversees GPIF’s budget, investment strategy and hiring, sets new targets for pension funds every five years based on the outlook for returns needed over the next 100 years to fund payouts.

The BOJ will fail in its 2 percent inflation goal, Mitani said in an interview in December.