Pensions quit bonds for alternatives & pooled JP Morgan finds

As Japanese defined-benefit pension funds tip-toe their way across a low returns minefield seeded with opportunities which could just as easily blow up as blossom, they are increasingly favouring allocations to ‘alternatives’ and ‘general accounts’, this year’s poll by JP Morgan Asset Management found.                                         Text continues below table

In the year ending 31 March the two segments accounted respectively for 16.6% and 16.2% of portfolios but while the commentary which accompanies the survey results probes the former in interesting detail it does not mention the latter.

Of the 122 corporate defined-benefit schemes (representing a wide range of asset sizes) and two public service mutual aid associations polled, 80% said ‘yes’ when asked if they felt the introduction of negative interest rates had altered the investment environment. Text continues below table

Yet 66% said their asset allocation policies had not yet shifted as a result. The changes that did happen were seen in the continued drop in domestic bond holdings, to just 21.8% of portfolios compared with 26.4% the year before and policy of 35.4% five years ago, and the rise in alternatives from 15.0% to 16.6% compared with a policy of 9.1% in 2011/12.

First placed among the leading ‘key issues’ driving the moves was the Bank of Japan’s negative interest rate policy, which had counted for less the year before when rapid rises in volatility were at the forefront of funds’ fears. That anxiety abated to be replaced with preoccupations about President Trump’s policies generating rises in equity prices and rates, growing trade protectionism and fears about the impact of Brexit. Text continues below table

JP Morgan’s report makes no mention of Japan’s dire demographics nor of pension funds’ need for secure liquid assets from which to pay benefits bills that now exceed their income from contributions and will do for decades to come. This makes it hard to see how the retirement schemes can run down their yen bond holdings any further.

It also makes it easy to see the attraction of investments which yield secure income directly to investors rather than through the mechanism of the stock market. Text continues below table

These debt investments are dubbed ‘economically neutral’ by JP Morgan which says nothing about the types of vehicle through which they are held. In Europe this trend now embraces the direct holding of loans made to revenue-generating projects.

Such assets are attractive at a time when domestic and foreign equities are seen as strongly correlated and bonds perceived as linked via the foreign exchange markets. Absolute return strategies have also come to be seen as correlated with other assets and are starting to decline in popularity.

The survey found no consistent differences in  broad asset allocation patterns among pension funds of different sizes  seeking the same levels of return.

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The unremarked high polling score of investing via ‘general accounts’ is intriguing and could suggest either a return to this type of asset management or an unusually high proportion of portfolios is being parked on the sidelines awaiting clearer conditions –  a new normal that may, or may not, one day move into view.

General accounts (called co-mingled in the US) are investment pools provided by life cos and trust banks to pension fund customers for whom they act as sokanji by undertaking all their domestic custody and administration business.

Before the deregulation which began in 1995 this was the only route through which pension funds could invest – as it was in the US before the 1975 ERISA legislation. In the decades of rolling consolidation since then both types of provider have strengthened their offerings.

The yen amounts in these accounts fell it the years ended 31 March 2016 and 2017 (see archive 17 October 2016 Pooled pensions biz holds up slightly better than segregated and 2 June 2017 Pension amounts in pooled accounts falls 4.4% to 78.5tr yen) as the number of corporate retirement schemes dropped. However, it seems that for at least the sample funds polled by JP Morgan the proportion of funds allocated in this way is rising.

This echo of simpler – and extremely low yielding – times comes as the managers of today’s retirement nest eggs have, on average, already adopted 3.8 of 10 alternatives strategies on which the JP Morgan report focuses.

The study is one of three annuals that students of the sector cannot do without. The other two are the Lakyara reports from Nomura Research Institute which now has no regular month of publication and the Pension Fund Association’s report on its members’ (as distinct from it own) allocations which appears towards the end of each calendar year.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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GPIF’s buoyant returns on equities boost assets to record level

The Government Pension Investment Fund made a return of 5.86% in the year to 31 March, enjoying investment income of 7,936.3 billion yen that helped to bring its assets to a record 144,903.4bn yen, its just-published summary results show.

The Fund ended the previous year with assets of 134,747.5bn yen which added to investment income for the term just closed gives a total of 142,783.8bn yen. The 2,119.6bn yen difference between that the new total is not explained.

Returns on domestic and foreign equities, both over of 14%, overwhelmed the loses incurred on bond holdings which make up half the portfolio. The proportion of domestic bonds is now running at 35% — about what the Fund needs to ensure sufficient liquidity to pay benefits. Holdings of FILP (Fiscal Investment & Loan Program, or zaito) bonds have shrunk to almost nothing.

Performance relative to benchmarks is not shown in the summary results and details of any changes in the line-up of external managers will also have to wait until publication of the annual report later this year.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

 

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GPIF goes ESG, misses point on own stewardship

The Government Pension Investment Fund had by the end of June committed 1 trillion yen of 3 trillion yen which it plans to invest over the next three to five years in about 300 “companies with strong governance that protect the environment and do social good”, according to an unsourced article in the Nikkei.

The five paragraphs devoted to the story focus on explaining what ‘ESG’ is and on GPIF’s adoption of new indices* with components that to capture the potential of such investments.

The text also notes that moving into these equities 10% of the capital which the Fund has, in its word, previously”parked” in other shares, “could put at a disadvantage the stocks of companies that do not make the cut, for example due to governance issues”.

The coverage does not address how the moves are to the advantage of Fund subscribers who entrust it with management of their basic pension contributions and the payments which they and their employers make to Employees Pension Insurance. Yet such enhancement can be the only legitimate reason for making the move, as the stewardship code which GPIF is keen to enforce makes clear.

Meanwhile the Fund seems unable to see that the habit among some staff of leaking information about its investment practices– which may or may not be subsequently followed by announcements on the web site it has heralded as a break in communications with its members — does not speak well of its own governance.

It suggests, rather, that the staff leaking the moves are involved in some sort of internal tussle to make sue it is their investment philosophy which predominates.

GPIF also appears to have become a party with custodian banks in some class action law suits including two against Volkswagen and one against Porsche. In the days before he returned to Japan and took to travelling by bicycle, GPIF Chief Investment Officer Hiromichi Mizuno was a private equity man at Coller Capital in London, where he reportedly drove a not very ESG-friendly Ferrari.

*Update: On 3 July GPIF announced the three indices it has selected for its ESG investments.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

 

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Institutional assets under management continue to mark time

The business of managing Japanese institutional pension investments in segregated accounts is in stasis. There is little by way of new business and with the big shifts in asset allocation seen two to three years ago now done, the composition of portfolios is barely budging. Even the thrills and spills of year-end window dressing are apparently a thing of the past. A similar pattern prevails among the country’s life insurers (see archive 14 June Life cos’s allocations steady as they take wait-and-see stance).

The economy is providing full employment but, as the IMF noted recently, seems to lack the dynamism to go anywhere very special and actual structural reform, as promised by Abenomics, appears to be boiling down to demands that asset management firms take an active stewardship role in improving the conduct of publicly quoted companies — even as the investors who pay their fees stay away from that process in droves.

Moreover huge swaths of the markets for stocks and government bonds are today held by the Bank of Japan, the Government Pension Investment Fund and other official players.

While the yen is more stable than it has been for years there is as yet no evidence that this is powering a new push abroad though such may well be in the works. So too may be a shift among investors to vehicles adopting different styles of management while retaining much the same balance of asset classes.

Roll on the Olympics with the optimism they can inject into the economy, and the national mood, and the concrete examples the games can provide of what infrastructure investment means.

Assets under management by member firms of the Japan Investment Advisors Association fell 0.8% in the quarter ending 31 March 2017 to reach 212,099.7 billion yen just-published numbers show. Funds sourced from corporate and government-related pensions dropped by the same proportion although mandates in issue from the latter rose 2.3% in the term. Growth in the ‘other’ component (thought to be composed mostly of regional banks looking for a home for their surplus funds) now seems to have run its course.                     Text continues after tables

 The government category is dominated by the Government Pension Investment Fund which is the chief proponent of pushing fund managers to adopt pro-active stewardship of the companies whose stock they hold.  GPIF’s mandates are so large, at an average of 187.3bn yen at 31 March (down from 193.1bn three months earlier), that firms are keen to be in its good books despite the burdens it imposes. The average size of a corporate mandate in issue is a still-worth-having 6bn yen.

In the ‘concluding statement’ to its most recent official mission to Japan, the IMF noted “Abenomics has improved economic conditions and engendered structural reforms” so that:

The current momentum in the Japanese economy provides an opportunity to push forward with reforms that will enhance growth and inflation prospects and mitigate medium-term risks. Above-potential growth and low unemployment provide room for actions that would be more difficult in other times. The need for a bolder approach is highlighted by several factors. First, recent growth is grounded in external gains and temporary fiscal stimulus. Second, labor shortages have yet to feed through to wages, and inflation has not shown a durable lift-off. Finally, demographic headwinds and an unprecedented level of public debt will continue to generate significant policy challenges over the medium term. A comprehensive policy package—built around macro-critical structural reforms and income policies—is needed to make the most of monetary accommodation and available fiscal space. This package should include a credible medium-term fiscal consolidation plan, based on gradual adjustment, as well as policies to contain financial risks stemming from the low-interest rate environment and demographic headwinds.”

Well, yes, but this is rather like concluding that the best thing to put in mousetraps is cheese.

The latest edition of ijapicap’s annual ranking of JIAA member firms by assets under management at 31 March will be posted here soon.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Where will the trillions of dollars from Fed shrinkage go?

The US Federal Reserve intends to shrink its balance sheet by not reinvesting in government debt the repayments of principal it will receive as its current holdings of such paper mature, according to an addendum to the central bank’s decision to raise the Federal funds rate by 0.25 to 1.25%.

This is very similar to the route taken by the Government Pension Investment Fund in reallocating its assets away from Japan Government Bonds which it has done by waiting until the paper matures and then reinvesting the proceeds in domestic stocks and foreign markets.

Glaringly absent from the Fed’s announcement is any indication of what it will do with the proceeds from its redemptions. These will initially be capped at US$6 billion per month for Treasury securities, later rising to a monthly maximum of $30bn, and $4bn per month for agency debt and mortgage-backed securities, later rising to a monthly maximum of $20bn.

The size of the balance sheet which the Fed is seeking to ‘normalize’ (it does not say ‘shrink’) has grown from US$870,261mn on 30 July 2007, before the financial crises, to $4,476,108mn on 5 June 2017, as it has fought to stave off a recession.

Will the billions resulting from what the Fed receives for maturing paper be somehow funneled back to the coffers of the entities which issued it — perhaps by them simply not paying the amount due on redemption? Whatever the mechanism does it amount to cancelling the debt?

Will the Bank of Japan take the same route when the time comes for it get back to ‘normal’? If the Fed does it, almost certainly.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

 

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Life cos’s allocations steady as they take wait-and-see stance

Japan’s life insurance companies closed the financial year on 31 March with their investment portfolios in a holding pattern that has them opting to ride out market movements and resistant to the usual end-of-term window dressing.

Figures just released by the Life Insurance Association of Japan give context to the remarks of its chairman last week when he asked that the Bank of Japan make clear its strategy for ending the distortions in the Japan Government Bond market (see posting immediately below).

Given the country’s underdeveloped corporate bond market, and Japanese companies’ lack of any need to borrow, government debt is one of the few ways  life cos can match the duration and currency of their liabilities to their assets.

But BoJ’s massive purchases have distorted valuations and removed much of the previous certainly from the market.

At year-end the sector’s combined holding of JGBs accounted 39.5% of portfolios, much the same as at the close of the previous quarter, though this is much less when Japan Post Insurance in removed from the picture (see archive 20 March 2017 Life cos (-Post Insurance) now have 30% of their money abroad).                     Text continues below table.

When asked by Reuters in October last year about their asset allocation intentions for the half year to March 2017 (see archive 7 November 2016 Life cos invest overseas as need for yield becomes paramount) their answers were on the way to being as mixed as they became by six months later (see archive 26 May 2016  Life cos’ portfolios move more diversely than usually depicted).

Vendors of infrastructure-based products are already knocking on the doors of more than just Nippon Life is known to have established an allocation for the sector. (see archive 1 May 2017 Life cos’ shape up in foreign debt, infrastructure markets).

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Life insurers ask BoJ to map out how it will exit easing

‘”The BOJ shouldn’t be afraid of revising (its exit strategy) in the future and openly debate the subject now, paying heed to market voices,” Akio Negishi, chairman of the Life Insurance Association of Japan, told a news conference on Friday’ according to Reuters.

Buying up Japanese government bonds has been at the core of the central bank’s quantative easing strategy and how this paper is valued directly impacts life cos’ balance sheets which at 31 December were worth 369,119 billion yen of which 40% was in JGBs [see archive March Life cos (-Post Insurance) now have 30% of their money abroad]

‘”We hope the BOJ releases [details of an exit strategy] with clear, meticulous explanation” that could avoid causing market confusion”‘, Mr Negishi added.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-20

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GPIF’s Mizuno “not satisfied” with asset managers’ governance

Japanese asset managers  … “have to have best-in-class corporate governance before they ask their portfolio companies to improve their corporate governance… ‘I’m not very satisfied so far’”,  GPIF’s CIO Hiromichi Mizuno told a London conference on Tuesday according to Investment & Pensions Europe.

In addition “Mizuno said he wanted to incentivise Japanese corporates to perform better on environmental, social, and governance issues, and allocate more to corporates and managers that took such issues seriously.

“GPIF also wants to bridge a communication or transparency gap between ESG researchers and the companies they evaluate, he said.

“Mizuno said he was ‘tired’ of hearing those assigning ESG scores to corporates saying companies were not good enough or did not disclose the necessary information, while on the other side corporations said they did not know what information the ESG researchers were looking for.

“GPIF is therefore demanding that index vendors and ESG researchers disclose the methodology they use so companies know what information is being sought, said Mizuno.”

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

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Pension amounts in pooled accounts falls 4.4% to 78.5tr yen

Trust banks and life insurance companies acted as sokanji to 13,650 corporate pension funds in the year ending 31 March 2017, down by 150 from a year earlier, figures just published by the Life Insurance Association show.

In this powerful gatekeeper role the firms not only manage clients’ assets in pooled accounts but also provide custody, administration and many other services.The relationship is usually in perpetuity.

All company retirement schemes which pay defined benefits must have an such an ‘organiser’ under a law which directs that smaller plans use life insurance companies and the larger arrangements trust banks.

With Employee Pension Funds being officially phased out, the year just-ended saw the number of EPFs drop from 256 to 110 while so-called DB schemes (many of which are converted EPFs) also fell to hit 13,540 from 13,690.

At the same time the number of scheme members went below 10 million for the first time to reach 9.57mn — probably in line with the country’s contracting work force numbers.

Trust banks had 3,808 clients DB-scheme clients for whom they managed 43,938.1 billion yen, compared with 42,676.5bn yen for 3,776 DB customers in the year ending 31 March 2016.

Life cos by contrast had 9,379 DB clients for whom they managed 15,062.0bn yen compared with 14,788.3bn yen 9,551 such customers last time.

Ninety-three EPFs now have just 17,924.3bn yen left with trust banks, down from 207 with 22,745.9bn a year ago, while just 17 of their number have 1,147.1bn yen with life cos against 49 with 1,461.0 in the previous term.

When the 300+ funds handled by Zenkyoren are added to the reckoning the financial year closed with 78,5144.4bn yen managed for pension funds in pooled accounts compared with 82,10702 a year ago.

The Life Insurance Association numbers are the first of two reports on the pooled funds sector to appear each year. The results of the survey by fortnightly newsletter Nenkin Joho, which breaks down the numbers by individual trust banks and life cos, usually appear in July.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont,

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New code requires specifics on institutional shareholder votes

Update: By day’s end Sumitomo Mitsui Trust Bank, which nowadays likes to be known as SuMi TRUST, had issued a statement noting the importance of stewardship to its soul:

“SuMi TRUST understands the revised guidelines, in particular, with regards to voting rights. For Japanese shares held under management, SuMi TRUST will improve visibility by disclosing the results of all voting records for all investee companies on all resolutions in addition to the approval/disapproval of candidates.” ________________________________________________________

The Financial Services Agency will ask institutions and their investment services providers to “disclose voting records for each investee company” — rather than, as now, to show their voting records in aggregate — under new version of the stewardship code coming into force in June, according to the Nikkei Asian Review.

Locating the new code on the FSA’s web site is not straightforward. It is here.

On 30 May Nomura Asset Management became the first investment services provider to unveil its voting record on individual companies’ proposals (see archive for that date).

Almost four weeks earlier Dai-ichi Life had become the first life co to announce its intention to make such disclosures.

© 2017 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes big commitments of money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com and a link provided to the original text on that site.

This blog would not exist without the help and humour of Diane Stormont, 1959-2012

 

 

 

 

 

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