GPIF, others forced to move away from fixed income
25 Oct 2012
Large pension funds in Japan are being forced to rethink their portfolio management approach, according to Alexander Flatscher, director of CFA Institute codes and standards for the Asia-Pacific.
With a debt-to-GDP ratio in excess of 200%, two lost decades and counting, and continuing economic suffering from the impact of last year’s earthquake and tsunami, Japan’s economic situation is not the envy of many people, Flatscher wrote in a recent blog post on CFA Institute’s website. In addition, the country also faces problems arising from underfunded pensions funds, partly because of Japan’s demographics and a fund management approach with little diversification.
About 95% of Japanese government bonds (JGBs) are currently owned by domestic residents. State-owned institutions account for a substantial proportion of domestic ownership. For example, the Government Pension Investment Fund (GPIF) holds close to 10% of outstanding JGBs. With AUM of about $1.3trn at the end of June 2012, almost 65% of its portfolio had been invested in Japanese domestic bonds.
With payouts getting bigger than revenues, GPIF recently started to sell Japanese bonds, Flatscher wrote. At the same time, GPIF sees the need for higher returns. Subsequently it has made efforts to diversify its portfolio.
As one way to diversify away from its bond-tilted portfolio, GPIF recently started its investment programme into emerging markets and selected six asset managers to make its first investments in that region. GPIF, however, is not the only mammoth fund in Japan from which a more diversified portfolio may be expected going forward, he added.
The Japan Post Group would be another example. Being 100% owned by the government, it consists of two huge institutions: Japan Post Insurance, which has about $800bn of JGBs among its security holdings, and Japan Post Bank, which owns about $1.8trn worth of JGBs.
The Japan Post Group will potentially be listed within the next few years as the Japanese government is looking to sell the stock of a number of holdings, Flatscher wrote, citing Ryujiro Miki, investment risk manager at Japan Post Insurance Co. A listing could have a great impact on the market as this raises the possibility that it diversifies its asset allocation away from domestic bonds, Flatscher said.
A full-scale portfolio diversification may not be on the agenda in the short term, but it may happen in the mid to long term. Japanese funds have shown to be slow in reacting to changing investment environments.
Demand for JGBs is not expected to dry up in the short term, Flatscher said, as retail savers have continued to allocate much of their savings into bank deposits, which are then used for investment in JGBs by banks. Still, even a slight diversification away from JGBs to another asset class, such as domestic Japanese equity, may have a huge market impact given the size of AUM at some funds.
There is certainly a possibility that holdings of Japanese pension funds will be more diversified going forward, Flatscher said. Pension funds’ asset allocations may then reflect the interests of beneficiaries to a much greater extent than they do now. As a result, the present era, during which the Japanese government has been able to borrow with low interest, may be coming to an end in the not-so-distant future, he added.
Author: Penny Leung