The largest pension fund in the world, Japan’s Government Pension Investment Fund (GPIF) lost $136 billion in the last three months of 2018. This was mainly due to a massive sell-off of Japan’s domestic stock and foreign equity that drove down the Topix index by 18% and S&P 500 by 14%. While it is true that GPIF suffered a similar loss in 2001 and long-term returns outweigh quarterly movements in pension fund strategies, this case should function as a warning to any portfolio risk manager frustrated by depressed yields of low-risk securities.
It would be easy to dismiss this case as just a matter of a sudden burst of optimism or that led the GPIF’s management to include riskier assets in the portfolio. The answer lies in the environment of prolonged low yields of government bonds and an attempt to stimulate the domestic economy. In December 2018 50% of the fund’s portfolio consisted of foreign and domestic equities, while only 40% was considered safe prior to 2014. An aging population, a prominent issue especially in Japan, puts additional pressure on pension funds’ portfolio yields when funds pay more to retirees than they receive from them in contributions.



Could investors expect fixed-income market conditions to be more favourable in 2019? There are many factors to consider; the major being the development of US-China economic relationships and the expected tightening from European Central Bank (ECB) and Bank of Japan (BoJ). Substantially tighter monetary policy in the Eurozone grows less likely with each growth forecast cut, though. Also, the amount of negative yielding bonds globally has increased substantially since October 2018 corresponding to the above-mentioned sell-off of equities.

Source: Bloomberg

If we have really seen the end of tightening monetary policy of key central banks, risk-takers could use this largesse as tailwind for entering into riskier securities. Should investors choose to shift their holdings from US treasuries to other markets, the imbalance between demand and supply could exert upward pressure on Treasury yields, as US will have to increase debt issuance to service its growing budget deficit. But this development is predicated on market participants overcoming the fear of global economic slow-down. Until markets see policies that may bring stability to global growth, the dollar is likely to remain strong as assets considered safe remain in demand.



The global economy is beset by uncertainties, with tensions between the two largest world economies, US and China in the foreground.  Without a clear favourable resolution of this situation one is justified to wonder if a period of tighter money is really ahead of us. These are no times for pension funds to pursue more aggressive strategies without a more thorough consideration of what it may mean to provide the same quality of service in these market conditions without increasing contribution rates. Imagine, for example, what could have happened in 2008 if George W. Bush’s proposal to partially privatize the U.S. Social Security Trust Fund had been accepted in 2005 and the fund had included equities in its portfolio. Currently equity markets are just too jittery to compose a large part of risk-averse portfolios and upbeat economic data could easily reverse all the gains of this strategy by central banks hiking the rates. Fund managers might be looking for new ways to steer their funds between low bond yields and persistent volatility.

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David Prezelj
David Prezelj

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