Tussle at the Top for Japan’s Giant Pension Fund

(December 6, 2013) — A rift has developed between two of Japan’s Government Pension Investment Fund’s (GPIF’s) top chiefs over the giant fund’s domestic debt holdings.

Takatoshi Ito, chairman of the advisory panel serving the pension fund and a renowned economist, called for the GPIF to reduce its holdings of Japanese debt from its current 58% of the overall portfolio to 52%.

Speaking in Japan yesterday, Ito said now was the right time for the ¥124 trillion ($1.22 trillion) fund to sell up as the Bank of Japan is buying domestic debt, Bloomberg has reported.

A report recently published by the advisory panel called for greater investments in overseas assets, private equity, commodities, infrastructure, and real-estate investment trusts.

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But the suggestion has been publicly rebuffed by the pension fund’s president and aiCIO Power 100 member Takahiro Mitani.

The central bank, which is buying more than ¥7 trillion of bonds a month, will fail in its goal of spurring 2% inflation and the risk of owning so much domestic debt was overstated by Ito’s panel, Mitani said this week.

Ito’s speech appears to have had an impact on bond yields in Japan: the nation’s 10-year sovereign bonds touched 0.68% after Ito’s remarks, the highest since October 1.

The GPIF would have to sell about ¥7.5 trillion of local bonds to pare its holdings to 52% of its assets, according to calculations by Bloomberg based on the fund’s assets as of September 30.

Ito argued that if the GPIF did not reduce its holdings, it would send out the message to overseas investors that the largest institution doesn’t believe in Prime Minister Shinzo Abe’s economic stimulus plan to push inflation to 2%.

“Foreign investors are getting confused,” he said. “They think ‘isn’t this weird? Isn’t it a government organization?’ One of them must be wrong — either Abenomics is a mistake, or GPIF is going to see losses.”

Outside of Japan, opinion is divided on how the pension fund should progress. “GPIF is being bullied into reducing their bond holdings while all other private funds including insurance firms have been raising their bond portion and lowering stocks,” Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners, told Bloomberg.

“Japan Government Bonds holdings are one area they can have a very large impact, and yields are shooting up right now.”

(December 5, 2013) – UK pension funds’ appetite for de-risking while finding risk-adjusted returns has led to an increase in property and infrastructure investments.

The National Association of Pension Funds’ (NAPF) annual survey found more than third its members were invested in commercial real estate and a further 11% had considered it.

In addition, 23% of defined benefit (DB) funds had made some investment in infrastructure, with a further 18% actively considering it.

The trend was even more pronounced when considering just local government pension funds: Two-thirds of them had invested in commercial real estate and more than a third had invested in infrastructure.

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When looking at UK defined contribution pension default funds, the basic fund the member falls into if they make no investment choices, equities remained the largest asset class in the growth phase in 2013.

But allocation to “other” assets increased in both the growth phase and as members approached retirement, indicating default funds are diversifying into assets that might offer better risk/return characteristics.

However, around half still had not diversified at all and 11% had not yet reviewed their default.

The report also found the average annual management charge to be 0.46% for DB funds, but a wide range of charges was still found to exist.

NAPF chief executive Joanne Segars said: “In an economic climate of long-term low interest rates, funds are considering how to broaden their investments. The NAPF has argued strongly for some time that it should be easier for institutional investors to invest in infrastructure as an asset class, and our survey shows growing member interest in this form of investment.”

Referencing yesterday’s announcement from the government on a new National Infrastructure Plan and the existing Pensions Infrastructure Platform led by the NAPF and the Pension Protection Fund, Segars said: “We’ve seen a significant level of interest in the Pensions Infrastructure Platform from pension funds, and the government’s National Infrastructure Plan 2013 is also welcome.

“However, the government’s plan must provide a pipeline of assets that are suitable investment vehicles for pension funds, including assets with strong inflation-linkage to help pension funds match their liabilities.”

The survey also found the proportion of UK pension assets invested in domestic equities fell from 9.9% in 2012 to 8.8% in 2013.

The proportion invested in government fixed income assets remained relatively stable, although the allocation to index-linked gilts increased from 13% in 2012 to 15.6% in 2013.

The survey quizzed representatives of almost 890 pension funds, covering nine million scheme members and £706 billion of assets.