Pressure on the Government Pension Investment Fund to buy more stocks will benefit the public as well as boost equity markets, according to the head of a panel that advised on overhauling the world’s biggest retirement fund.
“Some are concerned the GPIF reforms are a way to raise stock prices, but actually they’re for pension recipients,” Takatoshi Ito told the Liberal Democratic Party in Tokyo on Tuesday. “Improved returns would lead to lower future pension premiums and a higher level of future benefits.”
The ¥128.6 trillion GPIF 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 should not be used as a tool to push up stock prices and pressure to do so is unfair, Takahiro Mitani, the fund’s president, told the Financial Times newspaper last month.
Investors are paying attention to everything Mitani says and does and he should be careful not to cause misunderstanding, Ito said. Ito’s government-appointed advisory panel urged GPIF in November to review domestic bond holdings and look at investing more in overseas assets.
“GPIF and others need to take more risk to increase returns,” said Stuart Beavis, head of institutional equity derivatives at Vantage Capital Markets in Hong Kong. “Diversifying away from Japanese bonds will reduce risk — not just buying Japanese equities but creating a more balanced global portfolio of assets. I think this will happen over time. The fund also has to show it is independent from politicians.”
The Topix index sank 8.1 percent this year through Monday, the biggest slump among 24 developed markets tracked by Bloomberg. Investors are questioning whether Abe can follow the first two parts of his “Abenomics” growth strategy — monetary easing and fiscal stimulus — with reforms needed to make the economic recovery sustainable.
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, Mitani said in response.
The fund needs independence from the government and a radical change to its investment strategy, Ito said Tuesday. It should reduce domestic debt to 52 percent of assets in the next few months, the lower limit of its current policy, he said. Allocations need to be revamped to allow a more dramatic shift and GPIF should seek to mimic global peers, who have 35 percent to 40 percent of their portfolio in bonds, according to Ito.
Japanese bonds accounted for 55 percent of the fund’s portfolio at the end of December, the smallest share since GPIF was established in its current form in April 2006. The fund held 17 percent of its assets in local shares last quarter, 15 percent in foreign equities and 11 percent in overseas bonds, according to a statement on its website.
“I’m not sure how much of a pressure Ito is on GPIF,” said Naoki Fujiwara, a Tokyo-based chief fund manager at Shinkin Asset Management Co. “It’s not like they’ll do things just because they are told to by him. If you look at the past, you can see that holding bonds helped them keep volatility low. It’s important to keep some assets in bonds.”
GPIF’s target allocation to domestic bonds is 60 percent, with asset managers given permission to deviate from this by as much as 8 percent.