Japanese Pension Takes Country’s First Gold Allocation

(May 17, 2012) — A Japanese pension fund has become the first in the country to allocate to gold, albeit through an exchange-traded fund, in an effort to escape being hit by world economic troubles.

The Okayama Metal & Machinery pension fund has allocated 1.5% of its Y40 billion ($500 million) to a physically-backed ETF, the Financial Times initially reported.

Yoshisuke Kiguchi, Chief Investment Officer at the fund, said the move was to ‘escape sovereign risk’.

Japanese pension funds have traditionally invested in high-quality fixed-income, with a lesser allocation to other mainstream assets. According to Towers Watson’s asset allocation survey, published this year, some 59% of all assets in Japanese pension funds were fixed-income securities. This is the highest percentage of allocation to this asset class by any nation with a major retirement fund sector.

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Japanese pension funds, on average, hold 80% domestic securities in their bond portfolios, according to Towers Watson. The average yield on a 10-year Japanese government-backed bond is around 1%.

Over the last 10 years, Japan has been the only country with a large pensions industry to see an aggregate drop in the level of its assets in local currency terms – despite the majority of funds being open defined benefit schemes. Assets fell by 0.7% over the 10 years to the end of 2011, Towers Watson said, mainly due to the poor domestic capital markets.

Although gold is a non-yielding asset, its safe-haven status has been desired by some during continued economic crosswinds.

Kiguchi said the pension fund trustees had been convinced of this investment decision as over the long term gold could result in being one of the ‘safe currencies’, the Financial Times reported.

Last week, gold hit $1600 an ounce as the Eurozone crisis continued to deepen, yet fell back shortly afterwards, despite no clear fiscal resolution in the region. This has led to some querying its safe haven status.

(May 16, 2012) — Some of the world’s largest investors are lining up to take advantage of China’s economic upward trajectory and new structure for foreign pension funds to invest in the country’s capital markets.

With quotas individually capped at $1 billion under the Qualified Foreign Institutional Investor (QFII) scheme, the China Securities Journal reported that the country may increase the maximum amount that a foreign financial institution can allocate. It did not say when or by how much the quota may be increased. The new mechanism for foreign pension funds to invest in China’s capital markets would be separate from the existing Qualified Foreign Institutional Investor program.

According to the newspaper, 37 QFIIs, including Norges Bank and Abu Dhabi Investment Authority, have applied to up their quotas by a combined $12.54 billion.

Last month, the China Securities Regulatory Commission announced that international fund managers would be permitted to invest a total of $80 billion in China’s onshore capital markets, up from the previous limit of $30 billion. The decision expanded the ability of QFIIs to invest in China’s stocks, bonds, and bank deposits. The regulator asserted that the decision to heighten the quota is meant to “promote opening of the domestic stock market, expand overseas investment channels for the yuan and to meet the needs of foreign investors on the domestic stock market”.

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The pressure on China to seek foreign investment comes as the benchmark Shanghai Composite Index has fallen nearly 17% over the past year, compared with a roughly 13% drop in the broader Dow Jones Asia-Pacific index over the same period.

In addition, according to the Wall Street Journal, the country may introduce a specialized Qualified Domestic Institutional Investor plan, allowing wealthy investors to purchase Hong Kong stocks directly.

Meanwhile, amid plans to diversify its overseas investment portfolio in the face of the US dollar’s weakness, South Korea’s pension is seeking a higher level of investment in China. “Early next year, we’ll seek approval from the Chinese authorities to buy more stocks on China’s bourses after we use up our initial quota,” a Korean National Pension Service spokesman told the WSJ.