Japan’s Government Pension Investment Fund (GPIF) on Friday reported a record quarterly investment gain, as the government debates whether the world’s largest pension fund should rethink its investment strategy.
GPIF posted an investment gain of 24.1 trillion yen ($152.24 billion) in the April-June quarter, lifting its assets by 8.2% to 317.8 trillion yen as domestic and foreign equities rallied.
GPIF’s $2 trillion portfolio is divided equally among domestic bonds, foreign bonds, domestic equities and foreign equities. The fund does not provide detailed commentary on its investment returns or conduct any public briefing on the report.
“We will continue to closely monitor short-term market fluctuations while managing assets from a long-term perspective,” GPIF President Kazuto Uchida said in a statement.
PUSH TO SHIFT INVESTMENT STRATEGY
Its strong performance comes amid calls for a major overhaul of its investment focus, only a year after the fund completed its latest five-year review.
Last month, Minister of Finance Satsuki Katayama said the government aims to steer state pension funds to increase local asset investments as domestic bond yields rise and stocks offer stronger returns.
However, government officials now say there has been no major policy action towards an imminent change to GPIF’s benchmark portfolio.
A more practical option, they said, would be to allow the fund greater freedom to move within permissible ranges around existing targets, without embarking on a strategic review.
GPIF’s basic portfolio sets a 25% target for each of four asset classes, with permissible deviations of five to six percentage points.
But GPIF has made limited use of that flexibility, partly because its institutional evaluation places emphasis on keeping holdings and investment performance close to its benchmarks, said executive researcher Koji Okuda at Dai-ichi Life Research Institute.
“That focus may have led GPIF to rebalance its portfolio more frequently than necessary,” he said.
CHALLENGES TO REFORM
GPIF is so large that even a modest shift towards domestic bonds or equities could reverberate through currency, stock and debt markets far beyond Japan.
A formal change to its basic portfolio would be a lengthy and highly institutionalised process.
The fund reviews its medium-term investment strategy every five years in conjunction with the health ministry’s actuarial review of the public pension system.
That exercise reassesses long-term pension finances and provides the basis for determining GPIF’s required return and benchmark allocation.
Although rising domestic bond yields could warrant another review, an overhaul in 2014 showed that major change requires strong political leadership. At that time, GPIF cut its domestic bond target to 35% from 60% and raised its domestic equity target to 25% from 12%, while increasing foreign assets.
The shift gained momentum only after Shinzo Abe began his second term as prime minister in 2012 and made GPIF reform part of his economic agenda. His government established expert panels and built support across ministries, including the health ministry, which oversees the fund.
Dai-ichi Life’s Okuda said the 2014 overhaul was underpinned by a clear political goal of reshaping Japan’s post-deflation economy.
“While the shift to inflation could provide a rationale for change today, the government has yet to embrace it with comparable political commitment,” Okuda said.
Reuters
