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2014-03-20 08:26:53
The world s largest pension fund is changing the way it invests, with big
consequences for the market
Mar 15th 2014 | TOKYO | From the print edition
WHEN George Soros, a billionaire investor, met Shinzo Abe, the prime minister
of Japan, at Davos in January, he hectored him about asset management. Japan s
massive public pension fund needed to take more risk, he reportedly told Mr
Abe. With 128.6 trillion ($1.25 trillion) of assets, the Government Pension
Investment Fund (GPIF) is the world s biggest public-sector investor,
outgunning both foreign rivals and Arab sovereign-wealth funds. Yet its
mountain of money is run by risk-averse bureaucrats using an investment
strategy not much more adventurous than stuffing bundles of yen under a futon.
It keeps around two-thirds of assets in bonds, mostly of the local variety.
Like an investing novice, it mostly follows indices passively, and hardly
ventures abroad.
The government would dearly love to oblige Mr Soros. Mr Abe is now taking steps
to overhaul the fund. In November last year an official panel laid out a plan
of far-reaching reform, some of which could take effect as soon as this year.
To boost returns to future pensioners, it concluded, the GPIF should reduce its
reliance on bonds, head into stocks and also invest in different asset classes
including infrastructure and venture capital.
Most radically, the government wants to break the ties that bind the GPIF to
the Ministry of Health, Labour and Welfare. It is the ministry s cautious
bureaucrats that keep the fund so averse to risk-taking. Even with a low
return, of an annualised 1.54% over the past 12 years, the GPIF has met its own
targets cheaply. The ministry is frugal to the point of meanness. The fund s
80-strong staff are often unable to buy the market data they need. It is one
thing to keep costs low, quite another to forgo receptionists, as the GPIF does
at its non-descript office in Tokyo.
For Mr Abe, geeing up the fund is part of his plan to revive Japan s economy,
alongside a radical monetary easing which the Bank of Japan began in earnest in
April 2013. As well as defeating deflation, Mr Abe seeks to boost risk-taking
in the economy. The planned changes to the fund also include demanding better
corporate governance from Japan s large companies.
Already, the markets are anticipating the effect of the slow shift in
direction. GPIF s influence is amplified by other public pension investors
following its lead. The fund lowered the weight of Japanese government bonds
(JGBs) from 62% in its portfolio in March 2013 to 55% at the close of the year,
putting most of the money roughly 8 trillion into local and foreign shares
instead (see chart). The GPIF s shift may have contributed to the giddy rise of
Japan s stockmarket, which was one of the best-performing rich-country bourses
in 2013. For investors, the likelihood that the GPIF will continue shifting
towards equities is a convincing reason to buy Japanese shares. That in turn
reinforces Mr Abe s will to enact the reform. So far this year the Nikkei s
rise, an important contributor to the government s broad popularity, has
stalled.
But for every equity punter cheering on the reform, there is a JGB holder
fretful about the eventual impact on prices if the asset class s biggest backer
continues to sell off. Investors have long predicted a meltdown in the Japanese
bond market, given that its public debt stands at nearly 240% of GDP. One
explanation of why the cost of borrowing for the government has remained low is
that JGBs are chiefly held by loyal local banks and by public pension funds,
rather than by foreigners who would demand a higher risk premium. Yet the
landscape is changing as retirees draw down their savings, meaning that
institutional holders will become still more important. Ominously, Japan s
current account has moved into deficit.
For the time being, the monetary easing undertaken by the Bank of Japan will
more than offset the effect of any bond sales by the GPIF. So now is exactly
the right moment for the fund to sell with no fear of triggering a broader
sell-off, argues Takatoshi Ito, the chairman of the government-backed panel on
the GPIF.
Yet though the fund may at last escape its duty of holding oodles of government
debt, the shift could exacerbate problems once the central bank starts
eventually to withdraw from its quantitative easing . The partial withdrawal
of the GPIF from the market, says Naka Matsuzawa, chief strategist at Nomura
Securities in Tokyo, may contribute to a crisis later on. When in December Mr
Ito called for a radical cut in the GPIF s bond portfolio from 55% down to 35%,
yields on JGBs temporarily rose.
The basic arguments for overhauling the fund are persuasive. With an ageing
population, meaning the fund is already paying out more in benefits than it
receives in contributions, it can ill afford to settle for a low-risk,
low-returns approach. Its strategy stands in contrast to pension pots in Canada
and Australia, for example, which are given leeway to be more daring. They also
regularly badger managers of the firms whose shares they own. Obliging the GPIF
to insist on more active oversight of firms would be the most useful way to
improve Japan s corporate governance, says Hans-Christoph Hirt of Hermes, a
British fund manager.
For now the GPIF and the ministry are together resisting Mr Abe s initiative.
The GPIF s purpose is not to lift the stockmarket but to invest the people s
money in a safe and efficient way, complained its president, Takahiro Mitani,
in February. The GPIF will probably seek to reduce its bond portfolio by as
little as it can. The labour ministry s bureaucrats are understandably loth to
forgo the prestige of managing the planet s single-largest pot of money. Yet
the government is determined to overcome opposition, say insiders. Mr Soros,
who reportedly made a cool $1 billion by shorting the yen in 2013, may soon be
called in to offer further lessons.