One thing we’ve discussed on a number of occasions lately is the fact that pension funds the world over are increasingly adopting the same behavior as other investors in a world characterized by artificially suppressed yields: they’re shifting to riskier [9] assets. In the case of US public sector pension funds this is a necessity because assumptions about investment rates dictate the discount rate used to calculate the present value of liabilities and so as soon as you admit you can’t make 8% when risk-free assets are yielding less than 2% in the US and close to or less than 0% in other locales, you effectively become even more underfunded than you already were. The solution is to take more risks in order to justify return expectations and in the US the percentage of funds' capital dedicated to equities has risen from under 30% in the mid-eighties to as high as 60% more recently while the fixed income allocation has steadily fallen.
As you might expect, Japanese public pension plans are also feeling the heat as the BOJ has driven yields on JGBs into the ground by planning to monetize the entirety of gross issuance. The result has been a truly epic shift out of domestic government bonds. As Bloomberg reports [10], Japan’s Government Pension Investment Fund sold nearly $50 billion in JGBs in Q4, opting instead to chase after higher returns in the stock market:
The $1.1 trillion Government Pension Investment Fund and its smaller peers almost doubled net sales of Japanese government bonds to 5.56 trillion yen ($46 billion) in the fourth quarter, the most in Bank of Japan figures dating back to 1998. They bought an unprecedented 2.39 trillion yen of foreign stocks and bonds. Selling of JGBs and buying of overseas securities has continued for six straight quarters.
GPIF posted its largest investment gain in almost two years last quarter after shifting more money into stocks from Japanese bonds, as it came under government pressure to boost returns to cover payouts for the world’s fastest-aging population. The Federation of National Public Service Personnel Mutual Aid Associations, last month said it will boost its investments in foreign stocks and bonds and cut exposure to domestic debt, matching the plan by GPIF…
Japan’s public pension funds raised domestic stock holdings for a fifth quarter, adding a net 1.73 trillion yen, the most since 2009. They held 5.6 percent of a record 1.023 quadrillion yen of outstanding JGBs at the end of December. The biggest holder, the BOJ, owned 25 percent of the total as of then, it said Wednesday in Tokyo…
GPIF hired four external managers of domestic and overseas stocks as it moves to boost equities to half its assets. It made a 5.2 percent return in the fourth quarter, the most since the period ended March 2013, according to a statement last month. Domestic shares returned 6.2 percent in the quarter.
And it’s not just GPIF. Three additional Japanese public pension plans are set to make the move into a more aggressive asset allocation as well which, as Reuters notes [11], will mean another $30 billion into equities:
Three Japanese public pension funds with a combined $250 billion in assets will follow the mammoth Government Pension Investment Fund and shift more of their investments out of government bonds and into stocks, two people involved in the decisions said.
The three funds and the trillion-dollar Government Pension Investment Fund, the world's biggest pension fund, will announce on Friday a common model portfolio in line with asset allocations recently decided by the GPIF, the people told Reuters.
Assuming, as expected, the three smaller mutual-aid pensions adopt the portfolio, that would mean shifting some 3.58 trillion yen ($30 billion) into Japanese stocks, a Reuters calculation shows.
The GPIF in October slashed its targeted holdings of low-yielding government bonds and doubled its target for stocks, as part of Prime Minister Shinzo Abe's plan to boost the economy and promote risk-taking.
There are a number of notable ironies here but the most obvious has to be the fact that a country’s Prime Minister would “promote risk-taking” with the assets earmarked for public sector employees’ retirement and the fact that encouraging recklessness is necessary because of a central bank that long ago gave up on acting sane (let alone prudent).
Actually that’s not the greatest irony. The most ironic part about this story is that shifting assets out of JGBs and into Japanese equities may actually be the best risk management play on the planet because as we’ve seen on any number of occasions lately, the BOJ has basically broken the market for government bonds by creating just about the most illiquid conditions imaginable (it turns out when you buy all of something, supply is affected) while it simultaneously intervenes to buy stocks any time the market opens lower, effectively underwriting [12] a furious equity market rally. So to summarize, the BOJ’s move to commandeer the bond market is driving pension funds into the equity market which the BOJ is also keen on owning [13] and in the new (para)normal, the country’s politicians are explicitly encouraging this and thanks to the fact that the bond market is broken, it might actually make some measure of sense. Welcome to the Twilight Zone.
