Thursday, August 4, 2016

The Looming Disaster At The World's Largest Public Pension Fund

This is a potentially huge problem that absolutely has to be, at minimum, papered over.
Inflation makes pension returns appear better, at least initially.
Until the beneficiaries checks don't stretch as far as they used to

From Pension Pulse, August 1:
GPIF's Passive Disaster?
Eleanor Warnock of the Wall Street Journal reports, Japan’s GPIF Pension Fund Suffers Worst Year Since 2008 Financial Crisis:

Japan’s $1.3 trillion public pension fund—the world’s largest of its kind—posted its worst performance since the 2008 global financial crisis in the fiscal year ended March on a fall in share prices world-wide and a strengthening yen.

The Government Pension Investment Fund recorded paper losses of ¥5.3 trillion ($51 billion), or a return of -3.81% on its investments, putting its total assets at ¥134.7 trillion at the end of March, the fund said Friday.

The GPIF’s results are seen as a gauge of broad market performance, as the fund owns nearly 1% of global equity markets and more than 7% of the Japanese stock market. Domestic and foreign equities comprised 44% of the portfolio at the end of March, below its 50% target weighting for the asset class, the fund said in a statement.

The GPIF isn’t the only major pension fund to struggle recently. The U.S.’s largest public pension fund, the California Public Employees’ Retirement System, or Calpers, said this month that it earned 0.6% on its investments for the fiscal year ended June 30, the second straight year the fund missed its 7.5% internal investment target. Norway’s Government Pension Fund Global had its worst performance since 2011.

Japan’s labor ministry has asked the GPIF to achieve a real investment return—accounting for a rise in wage increases—of 1.7% yearly. Though the fund’s performance for fiscal 2015 was well below that target, the fund’s average real annual performance of 2.60% over the past 15 years exceeded it.

However, because the GPIF manages reserves for Japan’s national pension plan, poor investment performance in the short term is judged harshly by the public and opposition political parties, many of whom are suspicious of financial markets. Even the timing of the announcement of the fund’s latest results had drawn criticism. Opposition politicians have pointed out that it was scheduled to come after national election earlier in the month. A loss reported before the vote could have hurt the ruling party’s showing, they said. The fund has said there was nothing political about the release date.

Domestic bonds were a bright spot in GPIF’s portfolio, even though the Bank of Japan has pursued a massive easing program in part to push Japanese investors away from domestic bonds and into higher-yielding assets. At the end of March, the fund had 37.55% of its portfolio in domestic debt—higher than the fund’s 35% asset-class allocation.

Domestic bonds returned 4.07% in the year ended in March as the BOJ’s asset purchases and the introduction of a negative interest-rate policy lifted bond prices.
Yuko Takeo and Shigeki Nozawa of Bloomberg also report, Japan Pension Whale’s $52 Billion Loss Tied to Passive Ways:  
Friday was a big day for the world’s largest pension fund, which posted its worst annual loss since the financial crisis and disclosed individual equity holdings for the first time. The two may be connected.

The list of domestic shares owned by Japan’s $1.3 trillion Government Pension Investment Fund hews closely to the benchmark Topix index, which isn’t that surprising for a fund where almost 80 percent of investments are passive. But it means that in market downturns like in the past year, GPIF will struggle to increase assets.

The fund recorded a 5.3 trillion yen ($52 billion) loss for the 12 months ended March, the largest decline in seven years. Japan stock holdings tumbled 10.8 percent. For Sumitomo Mitsui Asset Management Co., GPIF should branch out from hugging indexes.

“There’s more they can do,” said Masahiro Ichikawa, a senior strategist at the Tokyo-based money manager. “They should be more active with their currency hedging and their investments. They should also look to increase exposure to alternatives.”

While criticism of GPIF’s passive approach to investing isn’t new, this is the first year the fund posted a loss since it doubled its allocation to stocks in 2014 and reduced its investments in domestic bonds, which were the only asset to return a profit in the year. The fund is taking flak on both sides, from those who want to turn back the clock to when it held more bonds to people who say it should become more of a stock picker....MORE