(Bloomberg) — Japan’s government pension mutual fund made a record cut in the weighting of government bonds in its portfolio last fiscal year as the world’s safest asset led a global debt sell-off.
GPIF, as the world’s largest pension fund is known, cut US Treasury bonds and bills to 35% of its foreign debt positions in the 12 months ended March, from 47% earlier, according to an analysis by Bloomberg of the latest data. The weighting pivot comes largely from the Japanese fund that is increasing investment in European government bonds.
With the rebalancing, the fund is now more than a year into a new investment plan that has reduced reliance on Japanese government bonds and shifted its focus to higher-yielding stocks and foreign debt. While GPIF makes little comment on the annual changes in its portfolios, even minor adjustments are echoing in global markets, given the total investment of approximately $1.7 trillion.
GPIF said in its annual report that it has adjusted its allocations to reduce deviations from benchmarks. Some strategists suggested that the pension giant may have tried to cut government bonds due to a prolonged period of underperformance. Others said this could be incidental, as it wanted to mitigate risks by aligning weights with global indices.
Sure, GPIF’s government bonds had skyrocketed the year before, especially in shorter maturities, just as it was working on its new investment plan. This provides another reason — that extra money was only temporarily parked in US bills and bills as a substitute for cash before the fund moved into more permanent allocations.
Read more: How GPIF bets big on Treasury Market front-end
Whatever the motives, GPIF delivered a 7.1% return on external debt last fiscal year, compared to 5.4% for the FTSE Russell’s World Government Bond Index excluding Japan, against which performance is measured. That is the strongest result in four years against the benchmark.
FTSE Russell’s Treasury weighting was approximately 38% at the end of June, including Japanese debt.
GPIF’s allocations to French, Italian, German and UK bonds have all increased by at least 1.7 percentage points in the 12 months to March. Purchases of these securities totaled 5.72 trillion yen ($52 billion) after adjusting for exchange rate and bond price movements, Bloomberg’s analysis found.
While the weight for US bonds declined, GPIF still added about 1.1 trillion yen of government bonds to its holdings last fiscal year, after adjusting for currency movements and bond yields, according to Bloomberg’s analysis. That brought his treasure to about 17.5 trillion yen.
As part of its five-year investment plan that came into effect in April 2020, GPIF aims to divide its portfolio equally between stocks and bonds, then split these two asset classes equally between domestic and foreign markets. Japanese government bonds previously had a 35% weighting in total investments.
The changes are paying off, with last year’s returns on bonds and equities combined outpacing the fund’s composite benchmark for the first time in seven years.
It is not possible to fully assess how well GPIF has timed its adjustments as the fund does not disclose when changes have occurred during the 12 month period. But there is a clue in the fund’s annual report released in July.
The GPIF “substantially adjusted” allocations to dollar, euro and pound bonds as estimated tracking error was relatively high in the first half after the pandemic drove up market volatility, Eiji Ueda, the fund’s chief investment officer, wrote in the statement. report.
A tracking error refers to the standard deviation of a fund’s excess return relative to a benchmark index.
There was a huge movement in bonds during fiscal year 2020, with ten-year Treasury yields moving largely sideways in the first half, before rising about 100 basis points in the second half to about 1.7%.
The fund’s smaller competitors in Japan, who often follow suit, will scrutinize the latest changes.
“GPIF has a major influence on the investment decisions of other pension funds in Japan,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo. “What it does has an impact on the market.”
Looking at the more recent movements, Sera sees the attractiveness of Treasuries falling even further.
“Current yield levels are not compensating investors enough to take currency risk,” she said.
Finance Ministry data shows that Japanese investors have sold a total of $24 billion in US Treasuries since the Asian nation’s current fiscal year began on April 1. They have repaid $35 billion in the previous 12 months, the most in three years.
(Added commentary by CIO Ueda from annual report in 13th paragraph.)
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