Back in March, Japan's Global Pension Investment Fund appointed Norihiro Takahashi as its new president. Few paid much attention to it, but it may very well end up being one of the most significant events that occurred as we look back in twelve to eighteen months.
The GPIF manages roughly $1.2 trillion in assets, with over 60% currently allocated domestically between equity and fixed income. Given the state of the stock market and the negative interest rate policy in Japan, it would make sense that an incoming president would take a hard look at the current asset mix policy and adjust it to best suit the needs of its members, something outgoing president Takahiro Mitani has been vocal about in recent years.
Recall that back in 2014 under pressure from Prime Minister Abe to move the fund into riskier assets, Mr. Mitani reluctantly rebalanced its portfolio away from domestic bonds, and into domestic equities, something that clearly did not make him happy. "Our sole objective is not to invest so that the Japanese economy will be better; our job is to invest with the people's money in a safe and efficient manner so we can protect and manage their funds" the Financial Times quoted him as saying.
The policy asset mix change was dramatic, slashing target domestic bond allocation from 60% to 35%, and increasing target domestic stock allocation from 12% to 25%. Also not to be lost in that policy change is the fact that the target allocation to international stocks increased from 12% to 25%.
Today, the policy remains intact, with actual allocation percentages within the permissible range.
Which brings us to performance. The fund returned $42 billion in the three months ending December 2015, but in looking at the current state of the Japanese economy with future returns in mind, one would see where it is reasonable to assume that incoming president Takahashi would take a hard look at the current policy asset mix, and perhaps propose a rebalance away from domestic assets and into international – presumably U.S. bonds and equities.
As a result of NIRP, JGB's are now seeing negative yields prevail throughout the entire front end of the curve, and the long end at best will produce perhaps just under 50bps, and that's if the BoJ doesn't continue to push those into negative territory.
From the equity side of things, despite the BoJ's best efforts to push stocks up with their ETF purchases, the Nikkei is down double digits, with no real catalyst for improvement in sight.
If outgoing president Mitani had any words of advice to Mr. Takahashi, they were probably along the lines of making sure he does what's right for those pensioners the fund represents, and given the status of the asset classes above, what's right may very well mean another rebalance into international fixed income and equities (presumably U.S. given that nearly everyone else is enacting NIRP at the moment as well). If a move as drastic as the 2014 rebalance is seen during the first 12-18 months of Mr. Takahashi's tenure, it could mean hundreds of billions transferred into international assets, and out of Japan. This could have a significant impact on the investment landscape for everyone involved.
At the end of the day, the GPIF's hire could either make it easier for the Federal Reserve to hike rates (as the market is bid with the rebalanced funds), or it could trigger the use of helicopter money in Japan at the very hint of such a rebalance, something that Kuroda of course says the BoJ "isn't thinking about at all."
Time will tell the answer to this, but one thing is certain, the hire made by the GPIF in March of 2016 could certainly prove to be pivotal.
via http://ift.tt/1Odqo0d Tyler Durden