(MENAFN- DailyFX) Talking Points:
- The Japanese Government Pension Investment Fund the largest of its kind in the world reported a $64 Billion drawdown after the volatility in equity markets in August and September. - Just one year ago at the surprise Halloween announcement we heard GPIF taking on a significantly more aggressive investment allocation to offset extremely low bond yields; and they did this by increasing their investments into global and domestic stocks. - This increased investment from GPIF helped to further drive equity prices but after this outsized drawdown we may see the Bank of Japan become more reticent towards increasing or extending QE for fear of over-exposure to global equities. The Japanese Government Investment Fund is a behemoth in global markets. It’s the largest fund of its kind (managed pension funds) and with over $1.1 Trillion under management and its shifts in investment policy can carry huge impacts to markets. A mere change of a 1% allocation to this portfolio amounts to approximately $11 billion which can create huge price movements in most markets. To be sure this pension fund is the size of the entire Mexican economy. The fund alone can purchase all of the stock in Apple and Facebook and still have some left over. So this is a major market player whose shifts in investment policy can carry huge ramifications for markets… We saw just such a shift a year ago as Japanese QE was running out of government bonds to monetize and as the fund was facing investment-return pressure after six years of ZIRP drove yields on fixed-income investments to anemic levels the Japanese government elected to take on a more aggressive investment allocation. For a fund of this size stability is paramount. Ten or fifteen percent swings in assets means that there are swaths of retirees that have paid into the pension that will now not be paid out simply because of a decision of a politician to invest more aggressively. Traditionally these types of investors (pension/defined-benefit plans) have carried relatively risk-averse investment protocols in order to avoid such swings. This means a lot of bonds and fixed-income investments. And these are investments that aren’t earning very much right now as much of the world reels from six years’ worth of ZIRP with yields languishing near all-time lows. For Japan – this is a troubling prospect. Japan’s population is aging rapidly and many workers are retiring out of the workforce meaning that there is going to be an even greater need for GPIF to pay out in the coming years to keep the Japanese economy afloat. GPIF much like Social Security in the United States pays out more than it takes in; and when you combine lackluster investment returns with a declining asset base (by paying out more than you’re taking in) the fund was getting pressured from both sides to the point where its existence in 20 or 30 years could very much be in question. Last October – we saw Japan take action. In a Halloween (2014) surprise announcement the Bank of Japan announced an increase in their QE program in an attempt to further shore up their economy while also attempting to spark inflation (which may one day lead to higher rates). There was just one problem… the Bank of Japan had run out of Japanese bonds to buy under their QE program as they’re already monetizing every Yen of debt that the bank was issuing. So they needed to buy something else. And since yields were anemic and Central Banks around the world had propped up stock prices with continued onslaughts of support the idea of investing more of this pension fund into stock-based assets actually looked like a good idea. Last Halloween we saw the GPIF move half of its holdings into domestic and international stocks while reducing the allocation of fixed income in the portfolio. The fund set targets of 25% allocations into each Japanese and International stock while reducing domestic bonds to 35% from a previous 60% allocation. The GPIF also increased its allocation for foreign bonds to 15% from 11% with as much as 5% available for ‘alternative investments’ like private equity or real estate investments. And as long as markets are continuing to go up this is a good thing. The pension fund can get an extra return that can give it a more realistic chance at being able to pay out pensioners in the years to come. But when stocks aren’t continuing to go up this can present a very grave problem as that asset base takes an outsized hit that will be difficult to recover from. We heard as such this morning as the GPIF announced that it had taken a $64 Billion hit to the portfolio from the stock swoon of August and September totaling a -5.6% loss for the fund. This is the largest quarterly drawdown that the fund has ever seen since statistics have been collated since April of 2008. The chart below looks at the Nikkei along with the accompanying pop to prices after last Halloween’s surprise announcement coupled with the August/September drop that amounted to a heavy loss for the fund. Created with Marketscope/Trading Station II; prepared by James Stanley
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