World's Largest Pension Remains Loyal to European Bonds

(December 14, 2011) — Despite the region’s sovereign debt crisis, Japan’s public pension fund plans to stick with euro-denominated bonds.

The move goes against the recent trend among Japanese institutional investors slashing their exposure to euro-bonds, the Wall Street Journal reported. 

“Since we make investments with a long-term perspective such as 10 to 20 years, we don’t have to realize temporary book losses (in European bonds) as long as we expect the market to eventually return to normal over time,” Takahiro Mitani, president of the Government Pension Investment Fund, told Dow Jones Newswires in a recent interview.

Meanwhile, the fund is also preparing to invest in emerging markets.

The reported move by Japan’s Government Pension Investment Fund follows a September report by the International Monetary Fund (IMF), which noted that pension and insurance funds may up their investments in equities along with other riskier assets in emerging and developing countries. According to the group’s Global Financial Stability Report, historically low interest rates in industrialized markets are threatening pension plans in Canada, Germany, Japan, Switzerland, Britain and the United States. Due to the low interest rate environment of those markets, pension and insurance vehicles are being left underfunded as a result of their reliance on traditionally safe investments, which are yielding little or nothing.

Consequently, the IMF reported noted opportunity in more aggressive, relatively riskier assets. The report stated: “Investing in emerging markets is seen as potentially increasing portfolio returns without taking on excessive risk. A number of factors contribute to this view, including (i) underweighting of emerging markets in most portfolios (although exposure was already increasing before the crisis), so that emerging market assets can help diversify portfolios; (ii) low returns and increasing risk in advanced economies; (iii) a favorable view of the liquidity available in most large emerging markets; and (iv) an improvement in economic outcomes and a decline in policy risk in emerging markets.”

The move into European bonds and emerging markets by Japan’s pension fund also follows research by Invesco that showed institutional investors have upped their fixed-income exposure to their highest level in five years while fleeing equities. According to the research, corporate bonds were the main focus of investors’ growing interest in the asset class at the expense of government debt.