The Latest Victim of 2018’s Stock Rout Is the World's Largest Pension Fund

(Bloomberg) -- The world’s largest pension fund may have incurred a record loss after a global equity rout last quarter pummeled an asset class that made up about half of its investments.

Total assets at Japan’s Government Pension Investment Fund may have dropped to 155.6 trillion yen ($1.43 trillion) as of the end of December, according to calculations by Yohei Iwao, executive director of the institutional equities division at Morgan Stanley MUFG Securities Co. in Tokyo. That would be a record decline of about 14 trillion yen from the end of September. Results are due at 3:30 p.m. in Tokyo on Friday.

While stocks helped the GPIF generate returns for the previous two fiscal years, December’s global rout underscored the risks facing the fund since it revamped strategy in 2014 to accumulate stocks and pare domestic bonds. The GPIF may have little choice but to invest in equities as fixed-income yields, especially those of Japanese government debt, are too low, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo.

“It makes a sense for the GPIF to hold some risk assets in this environment because yields are low globally and bond investments don’t give good returns,” Fujiwara said. “Yet from a pensioner’s point of view, it takes too much risk on its investments.”

More than $10 trillion in equity value was wiped out from the global markets last quarter as an ongoing trade spat between the U.S. and China raised concern over a slowdown in growth.

The Topix index plunged 18 percent in the October-December period, the biggest quarterly decline since 2008, while the S&P 500 Index dropped 14 percent, the most since 2011. Japan’s currency strengthened 3.7 percent against the dollar in the quarter.

The GPIF probably had a loss of 7.7 trillion yen in domestic stocks and a decline of 6.6 trillion yen in overseas shares in the period, the Nikkei newspaper reported on Jan. 16, citing an analyst estimate by Nomura Securities Co.

Shingo Ide, the chief equity strategist at NLI Research Institute in Tokyo, points out that the GPIF’s long-term performance is more important than quarterly moves. Stock investments helped the fund generate returns for eight of the past nine quarters, pushing assets to record highs.

“There’s no need to be pessimistic just because the GPIF would incur losses on its investments on a quarterly basis,” Ide said. “For pension funds, it’s more important to focus on how they secure long-term returns rather than their quarterly performance.”

Still, with about half of its assets in domestic and foreign equities, the GPIF’s performance may be in danger of declining as concerns about the U.S.-China trade war and the U.K.’s departure from the European Union increase the risk of a global economic slowdown, according to Hidenori Suezawa, an analyst at SMBC Nikko Securities Inc. in Tokyo.

“Trade frictions between the U.S. and China haven’t been fully solved yet and there’s a possibility that the Brexit problem may be prolonged,” Suezawa said. “We can’t be optimistic about the investment performance toward March.”

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net;Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Naoto Hosoda, Kurt Schussler

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