Report states the obvious on two-month-old GPIF reforms

Nomura Research Institute and Boston-based Cerulli Associates have jointly a published a report on the Government Pension Investment Fund which notes that GPIF will be “unshackled” by recent moves to reform it.  Perhaps the report has more substance than the news release suggests.

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Foreign securities hit record 19.2% of life companies’ portfolios

The foreign securities component of Japanese life insurance company portfolios continued its growth in the second quarter of the 2014/15 financial year when it climbed 7.87% to make for a first half increase of 12.03% and year-on-year expansion of 20.38%, numbers from the industry’s trade body show.

At 19.2% of total holdings of 358.582 billion yen, overseas investments are now higher than their previous peak at 31 March 2005 when they accounted for 19.1% of 191,523bn yen. Text continues below table.

Japan life insurance co holdingsThe figures need to be read in conjunction with movements in the yen:US$ exchange rate which weakened by almost 7.63% over the second quarter making for a year-on-year decline of 11.53%.

In March 2005 the US$:yen rate was 107.205, not unlike 30 September’s 109.667 yen.

The Life Insurance Association of Japan has 43 members and since 2008 has included the government-owned Japan Post Insurance which is expected to listed on the Tokyo Stock Exchange next year.

As previously reported (see archive 24 November 2014 Japan Post likely to pout 6.3tr yen into stock market) the postal giant had only 1 billion yen of its 87,089bn yen holdings in overseas instruments at 31 March 2014. As it does not publish quarterly reports the amount it may have moved offshore since then is unknown.

If the company seeks to bring its portfolio into line with the rest of the sector before its privatisation then over 15 trillion yen could flow into foreign investments and further impact the exchange rate. The funds to do this would necessarily come from the 78% of its portfolio which the company keeps in JGBs — a 68tr yen stash on the future of which the government has been curiously quiet.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

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Making the most of 11,000 captive clients

Last year Sumitomo Mitsui Trust Bank handled all the custody work, the bulk of the administration and about 75% of the asset management business of 1,278 corporate pension funds with more than 500 members each.  It is unlikely ever to lose these customers but it is equally unlikely that their ranks will grow.

Resona Bank is in the same happy position with 1,148 retirement-scheme clients, as is Mitsubishi UFJ Trust & Banking with 885 and Mizuho Trust & Banking with 434.

Like life insurance companies – which service firms with smaller payrolls – the trust banks  are sokanji: holders of the serei shitei hojin designation to whom companies turn when first establishing a pension fund.sokanji table

Both client and service provider expect this relationship to continue in perpetuity and for the relationship to expand as additional functions, such as securities lending, develop over time.

This is the sole aspect of Japan’s corporate pensions management business never to have been deregulated and it is unlikely ever to be so. In future the pot of gold will shrink but it will take decades to disappear, making it a banking product of rare longevity.

In recent years the death rate among fragile company pension plans has been huge. In 2012 the around 70,000 so-called Tax-Qualified Plans known to the Ministry of Finance — but under little supervision — were given the option of closing, joining Serama (see previous posting), or converting to a type of defined-benefit or defined-contribution scheme supervised by the Ministry of Health & Welfare by 31 March 2013.  Today a little over 13,000 former TQPs live on as DB plans.

At the same time Employee Pension Funds (EPFs), already regulated by the Ministry of Health & Welfare, were allowed to convert to a structure which no longer includes responsibility for investing firms’ contributions to the state-run Employee Pension Insurance. There are now 700+ such conversions while 500 EPFs remain as they were.

Corporate restructuring has also reduced the number of funds, though not the asset levels in the system. As companies have merged with others in the same group, or with outsiders, so have their retirement schemes.

This upheaval has come to an end without demand for sokanji services shrinking to anything like the same extent as fund numbers but very few new companies are now setting up defined-benefit plans.

As a result, the total number of clients fell from 11,720 at the year ending 31 March 2012 to 11,521 two years later, according to the latest annual survey by Nenkin Joho, a fortnightly newsletter published by an actuarial consulting subsidiary of the Nikkei newspaper.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

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Japanese investors pour 1.82tr yen into Asia stocks & bonds

Bloomberg reports that:

‘Japanese investors are buying Asian assets like never before as Prime Minister Shinzo Abe’s policies make the yen a lucrative means to fund bets on regional growth.

‘A net 1.82 trillion yen ($15.4 billion) flowed into stocks and bonds in the rest of Asia in the first nine months of 2014, 76 percent more than the previous record in 2007, data from Japan’s Ministry of Finance show. Borrowing in yen to invest in the 10 currencies that make up the Bloomberg-JPMorgan Asia Dollar Index returned an annualized 13 percent this year through yesterday. That beat so-called carry trades funded in euros and dollars, which gained 11 percent and 0.3 percent, respectively.

‘Abe’s unprecedented stimulus to fuel inflation has boosted Asian markets, providing them with a buffer against potential outflows as the U.S. prepares to raise borrowing costs next year. Inflows to the world’s fastest-growing region are also being bolstered by the People’s Bank of China’s Nov. 21 decision to cut interest rates for the first time since 2012, and as the European Central Bank considers further monetary easing.

‘“Japanese investors caught the same grab-for-yield bug that investors everywhere caught,” Tim Condon, head of Asian research at ING Groep NV in Singapore, said in a Nov. 24 interview. “With the PBOC joining the Bank of Japan in increasing accommodation, and the ECB expected to join, the grab for yield looks set to persist in 2015.”’

US$34 billion to go

. . .  ‘Nomura Holdings Inc. estimates Japanese investors will pump $34 billion into Asian stocks and bonds over the next two years provided the nation’s pension funds meet their investment targets. Hong Kong, South Korea and India will be the top destinations in the region, Nomura said in a Nov. 24 report.

“The region’s economies continue to perform well and generally exhibit strong economic fundamentals,” Thiam Hee Ng, a senior economist at the Asian Development Bank in Manila, said in a Nov. 20 interview. “Once Japanese investors get more familiar and comfortable with other markets, they will increasingly see Asia as a useful diversification play.”’

For the rest of this insightful analysis by Kyoungwha Kim and Masaki Kondo visit here.

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End September GPIF equities holdings still well below target

When the second quarter of the Japanese financial year closed on 30 September the Government Pension Investment Fund’s allocation to domestic stocks was just 18.23%. — well below the new target allocation of 25% of a portfolio which has now swelled to a record 130.88 trillion yen.

GPIF asset alloc at 30 Sept 2014Investment return for the three months was 2.87% with the performance of asset managers handling three of GPIF’s four investment segments coming in below their benchmarks.

Holdings of domestic bonds fell from 53.36% to 49.61% of the total compared with a target of 35%. They should soon dip below 45% as the 5% in zaito bonds, issued by the Fiscal Investment and Loan Programme (FILP), is falling steadily as they are allowed to lapse rather than rolled over.

Investments in domestic debt are passively managed inhouse and met their 0.63% benchmark.

GPIF assets March & June 2014 pie chartsThe most notable rise was in foreign stocks which accounted for 17.41% of the portfolio compared with 15.98% at the end of June and a target of 25%. The return on this segment was 5.73%, 0.90% below the 5.64% benchmark.

The performance in international bonds — which accounted for 12.14% against 11.06% at the close of the previous term and a target of 15% — came closer to its yardstick which it underperformed by 0.01% for a respectable 5.51% return.

The results are here in full.

 © 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

 

 

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Japan Post likely to pour 6.3 trillion yen into stock market

The drama of a general election plus the accompanying stimulus package and an 18-month delay in implementing the consumption tax rise are pushing GPIF’s asset re-allocation away from centre stage and lining up another government institution — Japan Post Group –  to take its turn in the spotlight. This will probably happen twice.

Japan Post Insurance currently holds 78% of its 90.5 trillion yen portfolio in ‘corporate and government bonds’ with the bulk in JGBs. At 1 billion yen its allocation to Japanese stocks is so small that it accounts in percentage terms for nil. Foreign securities account for 1.4% and are thought to contain few, if any, stocks.

This is vastly more skewed away from risk capital than even GPIF’s before the Fund’s reform when 17.3% of its 67.9tr yen holdings were in Japanese equities and 15.9% in foreign stocks.Japan Post Insurance holdings

The Fund was contin-uously urged to change that position and the absence of any pressure on Japan Post Insurance to do ditto suggests that government is keeping this up a sleeve from which it will be theatrically produced if interest in the stock market starts to sag.

Just how much might be directed out of JGBs and into equities can be deduced from how Japan’s other 42 life companies divide up their portfolios.

The Life Insurance Association of Japan publishes numbers for aggregate holdings of its members using figures supplied by them. Japan Post Insurance is an LIAJ member but can be removed from the totals by deducting the figures published in its annual report.

This exercise shows that industry-wide portfolios net of the postal Japan life insurance co holdingsgiant were invested at 31 March as 46.4% in corporate and government bonds, 23.1% in foreign securities, 6.9% in domestic stocks.

So if Japan Post Insurance follows the pattern of its peers it will be putting at least 6.3tr yen into the local stock market and it may be more.

With the yen sinking faster than government would like the company may be dissuaded from moving over 20% of its holdings abroad and prompted to put money which would have taken that route into local stocks instead.

It looks as though 2015 will be a high profile year for Japan Post Group in other ways too.

Last week saw 15 companies approved for listing on the Tokyo Stocks Exchange and the proposed listing of the Group next year will allow government to beat the drum for local equities whenever interest looks like turning to other arenas and different dramas.

Please note that the numbers in the text and tables of this posting do not include the assets of companies’ foreign or  domestic subsidiaries.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

 

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Dai-Ichi set to overtake Nippon Life in premium income

When the mighty Nippon Life’s premium income for the first-half of the 2014 year, which closed on 30 September, is made known on 28 November it will prove less than Dai-Ichi Life’s already announced 2.59 trillion yen, according to the Yomiuri Shimbun.

If the prediction proves true Dai-Ichi could supplant Nippon as Japan’s third largest life co on the measure, ranking after Zenkyoren and Japan Post Insurance, and it could be on track to be around 11th in the world, compared with today’s 17th.

Dai-ichi, which translates as Number One, is the only Japanese firm in the sector to be publicly quoted in its own right as its competitors are either parts of large financial conglomerates or mutuals.

In 2010 the company bought Tower Australia Group for US$1.2 billion and in June this year it acquired Protective Life of the US for US$5.7bn. It is not clear if Yomiuri’s forecast is for premium income from Japan alone or includes that from abroad.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

 

 

 

 

 

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GPIF looking for transition managers

The Government Pension Investment Fund, the world’s largest institutional investor, which has recently announced a significant change in its asset allocation mix is looking for transition managers to help it achieve its goals.  The details are here.

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Investing pensions: Plus ça change, plus c’est la même chose

The Government Pension Investment Fund has published a 17-page English-language summary of the thinking behind its ‘Adoption of [a] new policy asset mix’ which is well worth reading.

As already reported (see post immediately below) the new portfolio will have 35% in domestic bonds, 25% in Japanese stocks, 25% in foreign equities and in 15% foreign bonds.

These proportions were worked out on the basis of GPIF’s investment horizon which is, in turn, based on the level of contributions by, and the projected life spans of, those who pay into the Fund and expect to receive pensions from it.

The summary notes (on page 6) that: ‘According to the Actuarial Valuation, the reserve asset level is to decrease for 10 years (payout is larger than contribution), GPIF assumed investment horizon 2which is followed by 15 years increase (payout is smaller than contribution). Then, the reserve asset level will decrease again.

‘Hence, the assumed investment horizon was set to be 25 years (10+15 years), beyond which the reserve asset is expected to start declining and investment policy should be more focused on the preservation of liquidity’.

The ‘Actuarial Valuation’ is likely to be that carried out once every five years by the Ministry of Health, Labour & Welfare, the latest iteration of which has been recently completed.

However the summary does not explain why the Fund can expect to enjoy a fifteen-year period in which contributions are larger than payouts in a decade’s time.

The size of the workforce will continue to decline during that period and the contributions which workers pay to the basic pension and employee pension schemes were set in 2004 to reach their maximum levels in 2017. They will then be 29,599 yen per month (in 2004 yen) for the former and 18.3% of salaries for the latter.

It may well be that MoHLW’s actuarial panel expects the level of benefits paid out to decline during this period — 2024-2039 –  due to a presumed rise in the overall death rate as pensioners born in the post-WWII baby boom pass away and off the books.

If so, it should say so — especially since there is already a suspicion that GPIF is being directed more to meet what Japan’s current government sees as the needs of the economy than those of the retirees who own the funds.

It’s 5-3-3-2 all over again

This is redolent of the days before the 1995 reforms when companies’ ‘Employee Pension Funds’ (EPFs) were obliged to keep to the MoHLW’s 5-3-3-2 rule which stipulated that no less than 50% of the portfolio be in yen-denominated fixed-income paper, no more than 30% in Japanese equities, no more than 30% in foreign securities and no more than 20% in real estate.

This was one of several routes through which Japan’s government became the most indebted on earth without having to worry about what fixed income markets thought of it.

At that time, as now, the bulk of basic pension contributions were used immediately to pay for benefits. What was left over was held by Nenpuku which was obliged to hand it on to the Ministry of Finance’s Trust Fund and thus to the Fiscal Investment and Loan Programme which paid for the ‘second budget’.

Reversal of fortunes

EPFs were gradually released from the restrictions of the 5-3-3-2 rule and from 2002 allowed to hand over to GPIF a component of their schemes – known as the daiko – which they had previously managed on government’s behalf.

These developments radically changed the nature of pensions demand for asset management firms’ services.

In 2002 they had stewardship of 38tr yen of Japanese retirement-scheme money of which 39% was for GPIF and 61% for corporate schemes.

By 2014 this had become 75% for GPIF and 25% for companies and the total had swelled to 126tr yen –  thanks in part to fund managers winning business away for trust banks and life insurers’ pooled accounts to be managed under segregated mandates.

The dependence on government and quasi-government GPIF Summary boxbusiness has grown in other ways too and it is now likely to be subjected to the same allocation guidelines as those set for GPIF.

As part of the 1990s’ reforms, a type of corporate pension fund known as a Tax Qualified Plan, about 60,000 of which were somewhat lightly supervised by the Ministry of Finance, were phased out.

SERAMA to go the same way?

Some of these schemes converted to one of the post-EPF types supervised by the MoHLW, others went out of existence and 30% of them opted to transfer their assets to the Small Enterprise Retirement Allowance Mutual Aid Scheme (Serama, the subject of an upcoming ijapicap profile) which now has 4tr yen in assets.

Serama will probably be ordered to follow the same asset allocation guidelines as GPIF whether or not it is actuarially appropriate for it to do so.

The two giant public service mutual aid associations — covering national and local employees — as well as one covering private school staff, which have combined assets of 27tr yen, have already been told they should follow GPIF’s suit.

It makes sense that any Japanese pension fund be free to have 50%, or even 100%, of its assets abroad since the growth opportunities are far higher there than they are at home, where the workforce is set to shrink and the economy must, ultimately, do the same.

Runs counter to good stewardship

But assuring the local stock market that it will always be home to a quarter of the country’s huge of pool of pensions savings is as unhealthy as previously assuring the government bond market that it would always have half.

In an age of equities indexing it seems especially misguided and antithetical to the Abenomics idea of shareholders seeking ‘engagement’ with companies through such devices as stewardship codes so as to make them better managed and more competitive.

The 5-3-3-2 rule lasted from the early 1960s to the mid-1990s and the new model asset allocation looks to an investment horizon of very similar length. By the time it comes to an end it will probably be causing massive distortions.

Leaving management of the funds to market forces and investment professionals would have been a much better bet. But this is Japan and Messrs Kuroda and Abe come from an old school of political economy — government knows best, even when it doesn’t.

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

 

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Government stops talk of firing big GPIF bazooka, and does it

The Government Pension Investment Fund has changed the allocation targets of its 126.6 trillion yen portfolio to 25% Japanese stocks (up from 12%), 25% foreign stocks (12%), 15% foreign bonds (11%) and 35% domestic bonds (60%) with no stated level for short-term.

GPIF announced the changes today immediately after the Bank of Japan said it would now aim for maintaining an expansion in the monetary base of 80tr yen, against 70tr previously, a process achieved largely by buying domestic bonds.

Both moves are aimed at kicking the stock market, inflation and the economy back onto more positive tracks – with the last benefiting from a fall in the value of the yen caused by increased outflows of capital from the Fund into investment markets abroad.

There is as yet no sign of the mooted economic restructuring which will be needed to provide momentum but other one-off moves, from the big three mutual aid associations, Japan Post Insurance and Serama, are waiting in the wings.

The shift at GPIF will put an additional 16.5tr yen into the stock market over the medium-to-long term. As Fund rebalances, it will allow its domestic equities holdings to deviate from their target by 9% (previously 6%) and local bonds by 10% (8%).

MAAs, Japan Post Insurance, Serama – it all adds up

A further 2.6tr will flow into local stocks if the three big mutual aid associations — those for local government officials, national public service personnel and private school employees –- follow GPIF’s lead, as they are expected to do.

Riches of even greater proportions could come from Post Office Insurance, part of the Japan Post Group which is due for an IPO next year, as it currently has none of it 85.804tr yen of assets in equities.

Similarly Serama (the Small Enterprise Retirement Allowance scheme) has 4.3tr yen of holdings – none of it in stocks.

So the government has much firepower to left to unleash after that from GPIF.

Many in the market guess that the Fund will implement the changes over be 2-3 years but there is no official word on the matter and it could be as long as five. This raises the interesting question of the value of the total portfolio to be allocated at that time.

Past the tipping point

GPIF is now in its decumulation phase with the number of retirees it serves rising every year while the number of contributing members falls. This will prevent domestic bond holdings from going much below 35% as it provides the liquidity from which pensions are paid.

GPIF portfolio 2002-2014Until the close of the past decade the value of the Fund’s portfolio was rising steeply as large blocks of capital moved under its control. When that phase ended it hit two years of poor returns and these combined with growing liabilities saw it shrink.

Better investment days then returned but the demographic trend has continued unstoppably.

The pensions behemoth says very little about its liabilities and any shortfalls it encounters are made up from tax receipts and, once inflation returns, via an ‘automatic adjustment mechanism’ (also called an automatic balancing mechanism).

But asset Japan population projection2managers and brokers looking for its business, or to the trends it is likely to set, are eventually likely to see as many stories about GPIF selling stocks to pay for pensions as they do today about it changing its asset allocation to improve returns.

In five years time will 25% of the portfolio be as much as it is today?

© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, 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.

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

 

 

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