The world’s biggest retirement fund should put half its $1.2 trillion of assets in stocks and increase its yearly return goal to 5 percent, according to the head of a panel advising lawmakers on overhauling public pensions.
The Government Pension Investment Fund should reduce its bond holdings to about 40 percent within two years, Takatoshi Ito said in an interview Friday in Tokyo.
The fund had a combined 68 percent of its assets in domestic and foreign debt as of Sept. 30. GPIF needs to raise the annual return it seeks, currently 4.1 percent, to fund retirement payouts for the world’s oldest population, Ito said.
“All big pension funds start out in bonds and move over time into stocks and alternative assets, but GPIF is about 20 years behind its global peers in this process,” said Ito, dean of the University of Tokyo’s graduate school of public policy. “They should aim for returns like those of foreign pension funds. That’s about 5 percent, over 10 years.”
GPIF, led by Takahiro Mitani, is under pressure to sell some of its holdings of the world’s lowest-yielding sovereign debt to buy investments that may provide higher returns. The Diet should pass a bill by June to give GPIF autonomy from the welfare ministry so the fund can change its investment strategy, Yasuhisa Shiozaki, deputy policy chief of the ruling Liberal Democratic Party, said in an interview on Jan. 21.
Demands backed by Prime Minister Shinzo Abe for GPIF to rebalance its bond-heavy portfolio are unfair given the institution has been independent of the government since 2006, Mitani said in an interview with the Financial Times reported Monday.
GPIF’s purpose is not to buoy the stock market and Ito “lacks understanding of the practical issues of this portfolio,” the newspaper quoted Mitani as saying.
GPIF owned ¥71.9 trillion of domestic bonds as of Sept. 30, making up 58 percent of its ¥124 trillion of assets, according to its most recent quarterly report. Japanese sovereign debt returned 2.8 percent in the 12 months through last week, a gauge compiled by Bloomberg shows, compared with 26 percent for the Topix index, including reinvested dividends.
GPIF’s stock portfolio should be evenly split between local and foreign equities and the fund should take a long-term approach to investment, Ito said. Local shares accounted for 16 percent of GPIF’s assets as of Sept. 30, followed by 13 percent in overseas equities, 10 percent in foreign bonds and 2.1 percent in short-term assets.
In the past, “politicians would say GPIF should get rid of all its stock holdings when shares fell, and when they rose and returns from bonds dropped, they’d say buy more stocks, leading them to sell at lows and buy at highs,” Ito said. “This is stupid. As an investment strategy, there’s no way you can make a profit from this. That’s what happens if you leave things to short-sighted politicians, and that’s why it’s important to gain independence from them.”
Ito’s panel in November said GPIF should consider investing more in overseas assets, private equity, commodities, infrastructure and real-estate investment trusts, to help cover rising retirement payouts as the world’s oldest population ages.
“We are seriously taking on board the pension panel’s recommendation that a review of a domestic bond-focused portfolio is necessary,” Naoki Katagiri, a spokesman at GPIF, said Monday. “We aim to consider making changes as fast as possible following things such as the pension financial review.”
The welfare ministry’s review of pension funds, which takes place every five years, is due this year. It will set new targets for GPIF based on its outlook for returns needed over the next 100 years to fund payouts.
The review should remove language from the 2009 report that said GPIF should target a 4.1 percent return while investing in “safe” assets, which GPIF took to mean bonds, Ito said last week.
“Investing only in bonds is generally viewed as reducing risk, but focusing on one asset and not diversifying is an extremely big investment risk,” a welfare ministry advisory committee wrote in a discussion paper released Thursday. “It’s hard to imagine that deflation and low rates will continue. If prices and wages rise, pension payouts will increase in tandem, but higher rates will lead to a decline in bond prices and a very high risk of losses.”
Japan’s 10-year sovereign bonds yielded 0.59 percent on Feb. 14, the lowest rate in the world. Prices excluding fresh food increased 1.3 percent in December from a year earlier, the Statistics Bureau said Jan. 31. The Bank of Japan is buying about ¥7 trillion of bonds a month as it seeks to meet a 2 percent inflation target.
“GPIF should shift the risk of holding domestic bonds to the BOJ while they are buying,” Ito said. “GPIF can make a drastic change in bond holdings within two years and it’ll have a limited market impact because the BOJ will buy them.”
Mitani said in December that the BOJ will fail in its inflation goal. Higher yields wouldn’t mean losses as GPIF holds bonds for their entire term, he said. In January, Mitani said the fund won’t add to JGB holdings and may invest in other assets as the debt matures.
GPIF is in “extreme danger” of losing out on the chance for better returns by keeping bonds until maturity, Makoto Utsumi, who helped shape the world’s largest retirement savings pool and is also the president of debt-rating firm Japan Credit Rating Agency Ltd., said this month.
“Holding bonds until maturity while the BOJ continues to intervene in markets means GPIF ends up with a huge amount of low-returning assets,” Utsumi, 79, said.
Opportunity cost “is another type of risk. Is it right to settle on such low levels for the public’s pension returns?”
Japan’s biggest retirement funds grew by an average of 0.9 percent in the 10 years through 2013 in local currency terms, the lowest rate among 13 markets tracked by a Towers Watson & Co. global pension study.
“It’s hard for GPIF to achieve returns of 4.1 percent with such a high proportion of holdings in bonds,” Ito said. “The welfare ministry should say to GPIF, ‘here is your target return, so you have the freedom to take on whatever risk is necessary.’ “
Equities made up 40 percent of the Japanese funds’ holdings, compared with a worldwide average of 52 percent, according to Towers Watson.
“The most respected large pensions in the world have over 50 percent of their investments in public equities, private equities, real estate, infrastructure and other alternative asset investments,” Charles Millard, Citigroup Inc.’s New York-based head of pension relations, said last week. “And they are diversified across the globe rather than over-concentrated in their home country.”
The November report from Ito’s panel also recommended that the fund be made independent from the Health, Labor and Welfare Ministry, which oversees GPIF’s budget, investment strategy and hiring.
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