World's Largest Pension Fund Needs More Risky Business

(Bloomberg Gadfly) -- It's time the world's largest pension fund boosted its risk appetite again.

Japan's Government Pension Investment Fund has been fleeing local government bonds ever since it doubled its allocation targets for domestic and overseas stocks in late 2014. It's likely to have already exceeded that quota due to the global equities bull run.

As of Sept. 30, the latest data available, GPIF's portfolio weighting in local and international shares was already within 1 percentage point of its target of 25 percent in either category. Since then, in dollar terms, the Topix and MSCI World Index have increased 14 percent and 11 percent, respectively.

This isn't to say GPIF will be forced into a fire sale -- the fund is allowed to exceed its targets by up to 9 percentage points -- but it does suggest its propensity to take on more risk is limited.

To ensure payouts meet a 1.7 percent real investment return, GPIF has been steadily moving away from domestic bonds. With 10-year yields hovering near zero -- a "yield-curve control" measure the Bank of Japan insists on -- GPIF had just 28.5 percent of its portfolio in domestic notes as of Sept. 30, well below the stated target of 35 percent. When the December quarter numbers come out, that's sure to be even lower.

To keep a little powder dry for riskier investments, GPIF has been putting some government bond redemption proceeds into deposits. Short-term assets topped 10 trillion yen ($90 billion) in September, and constituted almost 10 percent of GPIF's entire portfolio, even though such a category doesn't even enter the fund's policy asset mix.

To be fair, who wants to play in Japanese government bonds when animal spirits roam everywhere else? With more than 40 percent of the market, the central bank has the power to keep yields depressed. And as any fund manager knows, there's money to be made in a rising or falling market, but not a flat one.

BOJ Governor Haruhiko Kuroda shot down any suggestion that he's prepared to discuss an exit policy at a press conference on Tuesday, which means, hypothetically, 35 percent of GPIF's portfolio may not be earning a penny for the foreseeable future. This isn't an acceptable proposition for any money manager.

Perhaps envious of the 15.2 percent run in China H-shares this year, Japan's stock market is looking for any catalyst to catch up. On Tuesday, for the first time since 2014, the BOJ didn't lower its inflation outlook any further at the close of its policy meeting. The Topix rallied, ending at its highest since 1991.

The BOJ is notoriously stubborn. While almost all economists surveyed by Bloomberg believe the central bank can't hit its inflation target, fewer than half see it scaling back easing measures.

If the BOJ won't budge, GPIF should reconsider its position. To do nothing would be leaving money on the table.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2018 Bloomberg L.P.

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