GPIF Would Be ‘Stupid’ to Give Asset Goals First, Ito Says

By Anna Kitanaka and Shigeki Nozawa

Photographer: Tomohiro Ohsumi/Bloomberg

Takatoshi Ito, professor at the National Graduate Institute for Policy Studies.

Japan’s $1.2 trillion retirement fund would be “stupid” to announce its new investment strategy before adjusting asset allocations, said Takatoshi Ito, a top government adviser on overhauling public pensions.
Publishing target weightings in advance would move markets, forcing the Government Pension Investment Fund to buy at highs and sell at lows, Ito said in an interview in Tokyo on Oct. 14. GPIF should shift holdings as much as possible now, he said, while noting that the fund doesn’t seem to be doing so. Deciding the new asset split is taking time partly due to a debate on whether to make it public before or after changing the portfolio, Ito said.
Investors are waiting for the bond-heavy fund to
confirm it will cut Japanese debt to buy local stocks and overseas assets, after a government-picked panel led by Ito advised GPIF to sell bonds in a report last year. Yasuhiro Yonezawa, the chairman of GPIF’s investment committee, said in July that while it would be ideal to adjust the fund’s assets before the announcement, it must also avoid disrupting markets.
“Saying ‘we’re going to purchase as much as whatever percent’ before buying anything is a stupid idea,” Ito said. “It’s tantamount to not fulfilling their fiduciary responsibilities and not appropriately investing the money entrusted to them. It’s wrong, and I’m against it.”
Ito’s personal recommendation is for GPIF to reduce its target for domestic bonds to about 35 percent from 60 percent, he said. Japanese and foreign stocks should be increased to about 25 percent each from 12 percent, while the level for overseas debt should be kept at 11 percent, Ito said.

Possible Delay

GPIF hasn’t given a concrete deadline for its asset review, with Yonezawa saying in July that the process will probably be completed in autumn. It could come as late as December, the first month of Japan’s winter, as GPIF officials, members of its investment committee and the health ministry have different views on the best timing and approach, Ito said. There will be no delays to the fund’s governance and portfolio overhauls, Teruyuki Katori, head of pensions at the health ministry, said on Oct. 15.
Discussions on the timing of GPIF’s portfolio review will take into account Prime Minister Shinzo Abe’s views, Yasuhisa Shiozaki, the minister with responsibility for public pensions, said today in Tokyo. Abe wants the fund to conduct its asset revisions as soon as possible, the premier said on Sept. 24.
GPIF probably isn’t changing its allocations yet, according to Ito, a professor at Japan’s National Graduate Institute for Policy Studies who will soon take a position at Columbia University’s School of International and Public Affairs. Once it starts moving, it would be obvious from government and Tokyo bourse data on trust-bank holdings, as it would be hard to hide shifts of trillions of yen, Ito said.

Waiting ‘Ridiculous’

Trust banks, which manage pension money, bought a net 71.5 billion yen ($672 million) in Japanese stocks in the week through Oct. 3, according to Tokyo Stock Exchange figures. They were net sellers the previous week, offloading 22.3 billion yen, the data show. GPIF may need to buy about 4 trillion yen of domestic shares as part of its allocation changes, according to Barclays Plc estimates last month.
If GPIF plans to actively trade to reach the new asset split, waiting to start the process until “after it announces is ridiculous,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which oversees about $474 billion. “The market will front-run it, and our pension money will be invested at highs. It makes it pointless to entrust our savings to experts, and we should ask for it back so we can manage it ourselves. It makes those experts meaningless.”

Naive Approach

Everyone involved in stock markets is laughing about the naivety of making the goals public before changing the portfolio, Nicholas Smith, a Japan strategist at CLSA Ltd., said Oct. 8.
Should GPIF decide to take that approach, the fund must buy and sell over a long time period, according to Sera.
“If GPIF says it’s going to aim to reach its target allocations over a protracted period, and buys gradually every year, it can avoid being front-run,” Sera said. “It could let bonds mature and their share of the pie would decrease, and then the proportion of stocks and foreign assets would naturally rise. That would cause the least market impact.”