Nearly two years ago we wrote about how the largest pension fund in the world had been hijacked by political hacks in what would be a futile effort to prop up stocks in the "first failed Keynesian state, Japan." The post came in response to Japan's Government Pension Investment Fund announcing that it would slash its fixed income portfolio to double its target allocation to domestic and foreign equities, in essence, going outright long Central Banks.
Once upon a time, the world's biggest government pension fund, Japan's $1.1 trillion Government Pension Investment Fund, or GPIF, was apolitical, and merely focused on preserving the people's wealth.
Then everything changed, and with the reckless abandon of a junkie on a crack cocaine binge, aka Abenomics, the GPIF management was kicked out, and its entire mandate was flipped from preserving wealth, to gambling on #Ref! P/E stocks, in hopes of recreating the wealth effect of the super-rich (the only problem: Japan has reached its breaking point and the higher the USDJPY, and thus the Nikkei rises, the more the BOJ directly destroys its economy with an already record number of bankruptcies due to the plunging Yen getting recorder).
Worst of all, the GPIF became nothing short of the latest political pawn in what is now the the first failed Keynesian state, Japan.
Unfortunately, for Japan, and its tens of millions of pensioners, the only news here is simple: the entire country is now held hostage by Japan's last-gasp attempt to prove Monetarist and Keynesian policies work. Because, said otherwise, "Abenomics better work, or else all your pensions are toast."
Then, last month after the GPIF reported it's biggest fiscal year loss since the "great recession", a mere 5.3 trillion yen ($53 billion), we asked whether the pension fund had finally learned it's lesson. Would fund managers finally resort back to their original goal or preserving retiree wealth or continue in their failed efforts to prop up Japanese stocks. Alas, we concluded that maintaining the status quo was the most likely path forward.
So with Abenomics careening off the cliff and headed for a traumatic death, and with Kuroda having become the laughing stock of central bank circles, has Japan finally learned its lesson? Will the GPIF rotate out of money-losing stocks and back into bonds which are currently trading at record high prices? According to Morgan Stanley, the answer is not a chance, for the simple reason that as a result of an upcoming asset rebalancing, the GPIF will have no choice but to buy even more money-losing stocks.
Which brings us to today and the announcement of further staggering losses on the $1.3 trillion portfolio of the GPIF. Today the pension announced it lost 5.2 trillion yen ($52 billion) in 2Q 2016, or roughly 4% of their 129.7 trillion yen ($1.3 trillion) in assets. Not to rub it in too much, but that brings the rolling 4Q losses to an aggregate of nearly 13 trillion yen or $130 billion.
As Bloomberg points out, GPIF held 21 percent of investments in local stocks at the end of June, and 39 percent in domestic bonds. Overseas equities made up 21 percent of assets, while foreign debt accounted for 13 percent. Alternative investments were 0.05 percent of holdings, down from 0.06 percent at the end of March. GPIF targets allocations of 25 percent each for Japanese and overseas stocks, 35 percent for local bonds and 15 percent for foreign debt.
Therefore, GPIF returns are not terribly surprising given that ~21% of assets, or $275BN, are allocated to Japanese equities which haven't performed all that well over the past year. In fact, Japanese stocks are down about 22% in the past 12 months which represents about $60BN of losses or 4.5% of GPIF assets.
In case you're the "hopelessly optimistic" type, the Wall Street Journal points out the GPIF has no intentions of admitting failure and reverting back to a reasonable asset allocation model that might have some hope in preserving pensions for Japan's retirees. No, as deputy director-general of investment strategy, Shinichiro Mori, points out, the GPIF will maintain the status quo as "stock markets are on a recovery trend."
Shinichiro Mori, the GPIF’s deputy director-general of investment strategy, said that in the current quarter, strong U.S. jobs data for June helped stock markets and Brexit fears have subsided.
“The markets have since restored stability, and I believe stock markets are on a recovery trend. In the meantime, the exchange rate, the dollar/yen rate, is still flat. We are going to carefully monitor its movements going forward,” Mr. Mori said.
Mr. Mori said it would be hard to achieve the target for investment return by investing primarily in domestic bonds because their yields are low and there is a risk of bond prices dropping from current high levels. The benchmark 10-year Japanese government bond yielded minus 0.075% in Friday afternoon trading. Bond yields and prices move in the opposite direction.
“In the short term, there is greater volatility in return rates for our portfolio, but since we invest for the long term, it’d be easier to achieve the investment goal required for the pension system” with the current allocation, Mr. Mori said.
Well, if at first you don't succeed…
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